USD/CAD remains capped below the 1.3500 barrier, eyes on US CPI data

• USD/CAD weakens around 1.3478 on the softer USD.
• The Fed’s dovish comments and mixed US February labor market data reaffirmed the expectation for a June rate cut.
• BoC’s Macklem said it’s premature to ease monetary policy despite the recent cooling in inflation.
• Traders will closely monitor the US February Consumer Price Index (CPI) inflation data, due on Tuesday.

The USD/CAD pair remains caped under the key 1.3500 barrier during the early Asian session on Tuesday. The decline of the US Dollar (USD) and lower US Treasury bond yields weigh on the pair. Investors await the US Consumer Price Index (CPI) inflation data for February, due later on Tuesday. At press time, USD/CAD is trading at 1.3478, down 0.03% on the day.

The mixed US labor market data for February was not strong enough to convince the Fed of monetary policy expectations. Additionally, the dovish comments from Federal Reserve (Fed) officials last week reaffirmed the expectation for a June rate cut. Fed Chair Powell said last week during his semiannual testimony that more confidence is needed before the central bank is ready to lower the rate, but they’re not far from it. Money markets are pricing in around 70% odds of an interest rate cut by June, according to the CME FedWatch tool.

The Bank of Canada held the interest rate unchanged at 5.0% for the fifth consecutive meeting last week, as widely expected. However, the BoC governor Tiff Macklem said during a press conference that it’s premature to cut interest rates until there’s more progress in taming core inflation. He further stated that the central bank needs to give higher rates more time to do its work. Money markets have pushed back bets for a fully priced in rate cut to July from June. This, in turn, boosts the Canadian Dollar (CAD) against the USD.

Traders will closely monitor the US February inflation data on Tuesday. The headline CPI is expected to remain steady at 3.1% YoY, while the core figure is projected to drop to 3.7% YoY. On Thursday, attention will shift to US Retail Sales, which is forecast to improve to 0.8% in February. These events could give a clear direction to the USD/CAD pair.