USD/CAD prepares for a breakdown above 1.3500 ahead of FOMC minutes

• USD/CAD oscillates around 1.3500 as the focus shifts to Fed minutes.
• Modest growth in US inflation and robust consumer spending would force the Fed to keep interest rates higher for longer.
• The Canadian Dollar fails to maintain strength despite inflation for July remains hotter-than-expectations.

The USD/CAD pair juggles in a narrow range near the round-level resistance of 1.3500 in the European session. The Loonie asset remains at a make or a break level of around 1.3500 ahead of the release of the Federal Open Market Committee (FOMC) minutes.

S&P500 futures add some gains in London, portraying a minor recovery in the risk appetite of the market participants. US equities were heavily sold on Tuesday after Fitch warned downgrading of some of the big US banks including JP Morgan.

The US Dollar Index (DXY) demonstrates lackluster performance around 103.00 ahead of Fed minutes for July’s monetary policy. The FOMC minutes will provide cues about the likely monetary policy action for September and the inflation outlook for the rest of the year. Meanwhile, the 10-year US Treasury yield corrects to near 4.19%.

Investors seem baffled about Fed’s decision for September. Modest growth in US inflation and robust consumer spending would force Fed policymakers to keep interest rates higher for longer while Minneapolis Fed Bank President Neel Kashkari on Tuesday said that while the US central bank has made some progress in its inflation fight, interest rates may still need to go higher to finish the job.

Meanwhile, the Canadian Dollar fails to maintain strength despite inflation for July remains hotter-than-expectations. Headline CPI grew at a 0.6% pace, outperforming surprisingly higher estimates of 0.3%. Core inflation that excludes volatile oil and food prices expanded strongly by 0.5%. Annual headline inflation accelerated to 3.3% while core CPI remained stable at 3.2%.

Analysts at TD Securities expect the Bank of Canada (BoC) to hold rates at 5.00% into 2024, but the Bank will need to see more evidence of slowing activity to stay on the sidelines through Q4."