USD/CAD steadies below 1.3600 despite weak US Dollar

• USD/CAD trades in a tight range even though the US Dollar slides further.
• Rising Fed large rate cut prospects improve the appeal of risk-sensitive assets.
• The BoC may extend the policy-easing cycle next month.

The USD/CAD pair consolidates inside Thursday's range slightly below the round-level resistance of 1.3600 in Friday's European session. The Loonie asset remains sideways despite sheer weakness in the US Dollar (USD), suggesting that the Canadian Dollar (CAD) is also performing weakly.

S&P 500 futures have posted decent gains in the European session, exhibiting a strong risk appetite of investors. The US Dollar Index (DXY), which tracks the Greenback's value against six major currencies, slumps to near 101.00. The appeal of risk-perceived assets has improved as market speculation for the Federal Reserve (Fed) to start the policy-easing process aggressively has strengthened.

The CME FedWatch tool shows that the probability of the Fed reducing interest rates by 50 basis points (bps) to 4.75%-5.00% in September has increased sharply to 43% from 14% on Thursday. Fed large rate cut bets were prompted after the release of the United States (US) Producer Price Index (PPI) data for August, which showed that the producer inflation rose at a slower-than-estimated pace year-on-year.

US core PPI - which excludes volatile food and energy prices - rose steadily by 2.4%, while economists expected the underlying producer inflation to have grown by 2.5%. The headline PPI decelerated to 1.7% from the estimates of 1.8% and the former release of 2.1%. Soft PPI data has diminished fears for price pressures remaining persistent.

Meanwhile, a sharp weakness in the Canadian Dollar appears to be the outcome of firm expectations that the Bank of Canada (BoC) will extend the policy-easing cycle in the October policy meeting. The BoC has already slashed its interest rates by 75 basis points (bps) this year and more rate cuts seem warranted due to lingering growth worries. The Canadian labor market has been hit hard due to the maintenance of a restrictive interest rate stance by the BoC for a longer period.