USD/CAD remains steady above 1.3850, Fed rate cut pricing caps upside

• USD/CAD may lose ground as the US Dollar could struggle as softer PPI boosts Fed easing prospects for September.
• Traders await August US Consumer Price Index data, which could increase odds for a bumper Fed rate cut next week.
• The Bank of Canada is widely expected to resume its easing cycle this month after disappointing jobs data.

USD/CAD continues its winning streak for the third successive session, trading around 1.3870 during the Asian hours on Thursday. The upside of the pair could be restrained as the US Dollar (USD) could face challenges as traders fully price in a rate cut by the US Federal Reserve (Fed) in September, following softer-than-estimated US Producer Price Index (PPI) data.

Markets are now fully pricing in a 25 basis points (bps) rate cut at the Fed's September meeting, while the chance of a larger 50 bps reduction has also risen to nearly 12%, according to the CME FedWatch tool.

The US Bureau of Labor Statistics (BLS) reported on Wednesday that the US PPI inflation declined to 2.6% on a yearly basis in August from 3.3% in July. This figure came in below the market consensus of 3.3%. On a monthly basis, the PPI declined by 0.1% in August, compared to the 0.7% increase (revised from 0.9%) prior.

Traders shift their focus toward the August US Consumer Price Index (CPI), due later today, which could strengthen expectations for a larger 50-basis-point Fed rate cut next week. The headline CPI is forecasted to rise by 2.9% YoY in August, while the core CPI is projected to increase 3.1% YoY during the same period.

The USD/CAD pair draws support as the Canadian Dollar (CAD) receives downward pressure from the rising expectations of the Bank of Canada (BoC) resuming its easing cycle this month after disappointing jobs data. The Unemployment Rate in Canada ticked up to 7.1% in August from 6.9% in July, which showed that US tariffs pressured slow hiring momentum and tightened activity across key sectors.