USD/CAD drifts higher to multi-year highs near 1.4300, Fed rate decision looms

• USD/CAD edges higher to around 1.4310 in Wednesday's early Asian session. 
• The Fed will likely cut interest rates by 25 bps at the December meeting on Wednesday. 
• The Canadian Dollar weakens to nearly a five-year low on the political risks.

The USD/CAD pair trades with mild gains near 1.4310 during the early Asian session on Wednesday. The Canadian Dollar (CAD) fell to the lowest level since April 2020 amid political turbulence in Canada. The markets might turn cautious ahead of the US Federal Reserve (Fed) interest rate decision, which is expected to cut the interest rates by 25 basis points (bps) on Wednesday at the end of its two-day meeting. 

The Fed is widely expected to lower borrowing costs on Wednesday for the third meeting in a row. Markets are now almost fully pricing a quarter of a percentage point cut at the Fed's December meeting, compared with about 78% odds a week ago, according to the CME FedWatch tool. The Fed's Press Conference and the Summary of Economic Projections (SEP), or the Dot Plot, will be pored over for clues about next year's outlook.

Data released by the US Census Bureau on Tuesday showed that Retail Sales in the US rose 0.7% MoM in November, compared to the 0.5% increase (revised from 0.4%) seen in October. The reading came in better than the market expectation for a rise of 0.5%. However, the US Retail Sales data had no impact on expectations that the Fed would cut interest rates at its December meeting on Wednesday. 

On the other hand, the Loonie remains on the defensive after Canada's Deputy Prime Minister Chrystia Freeland quit Monday in a surprise move, saying she disagreed with Prime Minister Justin Trudeau over US President-elect Donald Trump's tariff threats. Canadian Prime Minister Justin Trudeau faced growing calls to resign as the resignation of Freeland marked the first open dissent against Prime Minister Trudeau from within his cabinet.

"We think this level of political turbulence will raise uncertainty levels for Canadian consumers and businesses, adding to the headwinds already facing productivity-enhancing investment," Karl Schamotta, chief market strategist at Corpay, said in a note.