USD/CAD trades flat ahead of Fed rate decision and Powell's remarks

• Bank of Canada's Macklem may shift CAD outlook with comments on tariffs, inflation risks, and economic momentum.
• The Loonie remains vulnerable with monetary policy divergence in focus.
• Fed projections and Powell's tone may influence the direction of the Greenback and bets on a September rate cut.

The Canadian Dollar (CAD) is trading flat against the US Dollar (USD) on Wednesday as markets adopt a cautious tone ahead of the Federal Reserve's (Fed) Federal Open Market Committee (FOMC) Meeting.

At the time of writing, USD/CAD is holding steady at the 10-day Simple Moving Average (SMA) of 1.3651, with volatility expected to rise as traders digest the latest US economic data and await commentary from the Fed and the Bank of Canada (BoC).

Economic figures released earlier in the session point to a moderation in US growth momentum. May housing starts declined by 9.8% to 1.256 million, falling short of expectations. Initial Jobless Claims registered at 245,000 while continuing claims stood at 1.945 million, indicating a gradual softening in labor market conditions. These data points collectively reinforce the argument for a cautious policy approach from the Fed.

Fed to release updated projections, Powell's tone key

The FOMC is expected to leave interest rates unchanged at 4.25%-4.50% when it announces its decision at 18:00 GMT.

However, investor attention will be on the updated Summary of Economic Projections (SEP) and revised dot plot, which will outline how Fed officials view the path for inflation, growth, and rates over the coming months.

According to the CME FedWatch Tool, markets currently assign a 58% probability to a rate cut in September, reflecting softer inflation and slowing demand.

Fed Chair Jerome Powell's tone at the post-decision press conference will be critical. If Chair Powell expresses confidence that inflation is easing and downplays external risks, it could strengthen expectations for rate cuts, offering modest support to the Canadian Dollar. 

However, if he highlights lingering tariff uncertainty and the potential inflationary impact of the Israel-Iran conflict, it may justify keeping rates higher for longer, supporting the US Dollar and driving USD/CAD higher.

BoC Governor Macklem's speech may guide Canadian rate outlook

Attention will also turn to Bank of Canada Governor Tiff Macklem, who is scheduled to speak at the St. John's Board of Trade at 15:30 GMT. 

Governor Tiff Macklem's speech is anticipated to address three core themes relevant to Canada's economic outlook. 

First, he is likely to revisit the risks posed by US-imposed tariffs, particularly their impact on Canadian exporters and trade-sensitive industries. 

Second, Macklem is expected to assess the labor market and broader economic momentum, especially amid recent indicators of softening growth. 

Finally, markets will closely monitor his commentary on inflation dynamics, specifically whether the recent easing in price pressure is sustainable or if additional monetary policy adjustments may be necessary.

This comes after Macklem delivered his "clear and present danger" warning during the BoC policy announcement and press conference on June 4.

Traders will be watching both Powell and Macklem for clues on the trajectory of interest rates. Their comments could cause the USD/CAD to shift sharply as policy divergence and global risks continue to be key drivers.

holding steady at the 10-day Simple Moving Average of