USD/CAD moves below 1.3400 despite a stable US Dollar, Canada CPI, US housing data eyed

• USD/CAD halts its recent gains on dovish sentiment around the Fed interest rate cuts in early 2024.
• Governor Tiff Macklem stated that the BoC could begin rate cuts in 2024.
• The lowered US Treasury yields put pressure on the US Dollar.

USD/CAD retraces its recent gains registered in the previous session, edging lower near 1.3390 during the European hours on Tuesday. The USD/CAD pair experiences downward pressure despite a stable US Dollar (USD).

However, the Canadian Dollar (CAD) faced downward pressure following dovish remarks from Bank of Canada (BoC) Governor Tiff Macklem. He mentioned that the BoC could initiate rate cuts sometime in 2024. Market participants, anticipating the central bank to begin easing as early as April, expected a cumulative rate cut of at least 100 basis points by the end of the following year.

The anticipation of early interest rate cuts by the US Federal Reserve (Fed) in 2024 is driving up the prices of US bonds. This, in turn, is causing yields to depreciate, subsequently weakening the US Dollar. The US Dollar Index (DXY) hovers around 102.50, with the 2-year and 10-year yields on US Treasury bonds standing at 4.43% and 3.90%, respectively, by the press time.

The dovish comments from several Fed members solidified the speculation about interest rate cuts in the first quarter of 2024. However, New York Fed President John Williams dismissed the notion of a potential rate cut in March. Furthermore, San Francisco Fed President Mary Daly emphasized that speculating about interest rate cuts in the upcoming year is premature. As a result, Chicago Federal Reserve (Fed) President Austan Goolsbee, along with Cleveland Fed President Loretta Mester, pushed back on Monday against their bets for early interest rate cuts.

Market participants are likely to focus on key economic indicators, with Building Permits and Housing Starts from the United States (US) taking center stage on Tuesday. On the Canadian side, Consumer Price Index (CPI) data will be eyed.