USD/CAD drifts higher to near 1.3800 ahead of US ISM Services PMI

• USD/CAD edges higher to near 1.3795 in Thursday's early Asian session.
• BoC is expected to cut rates this month, driven by sharper-than-expected economic contraction in Q2. 
• Fed's Kashkari said policy is in a tricky position as inflation remains high.

The USD/CAD pair extends the rally to around 1.3795 during the early Asian session on Thursday. The prospects of a Bank of Canada (BoC) interest rate cut this month weigh on the Canadian Dollar (CAD) against the US Dollar (USD). The weekly Initial Jobless Claims, the ADP Employment Change, and the ISM Services Purchasing Managers Index (PMI) are due later on Thursday. 

The BoC is anticipated to cut the interest rate by 25 basis points (bps) to 2.50% at the September 17 meeting, driven by a sharper-than-expected economic contraction in the second quarter. Following the anticipated September rate cut, BofA analysts expect the BoC to reduce interest rates by another 25 bps in October and December, bringing the terminal rate to 2.0%. Rising BoC rate cut bets this year could drag the CAD lower and act as a tailwind for the pair in the near term. 

Federal Reserve (Fed) Bank of Minneapolis President Neel Kashkari said on Wednesday that the central bank is facing an increasingly challenging situation as it tries to balance its dual mandates. Kashkari added that Fed policymakers need to monitor tariff-related inflation to determine if inflation will be persistent.

Traders will closely watch the US August jobs data later on Friday, as it might offer some hints about the US interest rate path. Economists project about 75,000 jobs were added in August, while the Unemployment Rate is seen at 4.3%. A surprise downside in labor market data could boost the Fed rate cut bets and cap the upside for the pair.