USD/CAD backtracks after strong rally in April

• USD/CAD has pulled back after rallying strongly at the start of April. 
• US-Dollar strength drove the pair higher on the back of shifting monetary policy expectations.
• The Canadian Dollar weakened on the back of falling Oil prices, expected cuts to interest rates. 

USD/CAD is trading in the 1.3750s on Thursday, down roughly a tenth of a percent on the day as it continues to backtrack after the strong rally at the beginning of April. 

April's up move was driven mostly by the US Dollar taking off on a blend of higher-than-expected US inflation data, strong jobs data and uber-hawkish comments from the Chairman of the Federal Reserve (Fed) Jerome Powell. 

In a speech on Tuesday Powell further stated he thought it would take more time to reach the Fed's inflation target of 2%. "Given the strength of the labor market and progress on inflation so far, it is appropriate to allow restrictive policy further time to work and let the data and the evolving outlook guide us," he said. 

Expectations that interest rates in the US would be cut in June have now been almost totally scrapped in favor of September. Since higher interest rates attract greater inflows of foreign capital the delay has supported the Greenback. 

The Canadian Dollar, meanwhile, has weakened on increasing expectations that the Bank of Canada (BoC) will cut interest rates in June. The markets are now pricing in a 70% probability of such a move, according to analysts at Brown Brothers Harriman (BBH). 

Bank of Canada (BoC) Governor Tiff Macklem highlighted a declining trend in Canadian inflation on Tuesday which supports the thesis that the BoC is getting ready to cut interest rates. 

Macklem said, "there's some downward momentum in underlying inflation," and the data seems to back this view up with both core-trim and core-median measures of the Consumer Price Index (CPI) easing to 3.1% (the lowest since June 2021) and 2.8% (matching the July 2021 low), respectively, according to BBH.  

Further, a bout of weakness in Oil prices has also weighed on CAD, since Oil is the country's largest export. WTI Crude Oil has fallen 10% in April, from a peak of $87 a barrel on April 5 to $79 on April 18.