USD/CAD slips below 1.3850 amid weaker US consumer sentiment

• The Canadian Dollar gains traction against the US Dollar, with USD/CAD slipping below 1.3850.
• University of Michigan survey signals weaker consumer sentiment and expectations.
• BoC under pressure to ease, with economists forecasting a 25 bp rate cut on September 17 amid fragile domestic conditions.

The Canadian Dollar (CAD) strengthens modestly US Dollar (USD) on Friday, with USD/CAD hovering around 1.3840 during the American session. The pair is on track to record its second consecutive weekly gain, despite the Greenback holding firm following Thursday's Consumer Price Index (CPI)-induced decline.

Fresh data from the University of Michigan underscored a cooling in household confidence. The University of Michigan's preliminary September survey showed Consumer Sentiment at 55.4, down from 58.2 in the previous month and below the forecast of 58. The Consumer Expectations Index came in at 51.8, compared with 55.9 previously and 54.9 expected.

Inflation expectations, however, moved higher. The one-year outlook held steady at 4.8%, while the five-year gauge rose to 3.9% from 3.5%.

The US Dollar Index (DXY) has regained composure after the August Consumer Price Index (CPI) data confirmed that headline inflation remains slightly hot. At the time of writing, the index is trading around 97.75, up nearly 0.20% on the day.

Despite sticky core inflation, the latest batch of US data has given the Federal Reserve (Fed) plenty of reasons to ease monetary policy. Nonfarm Payrolls nearly stalled in August, earlier job growth was revised sharply lower by almost 900,000 positions, and the Unemployment Rate has climbed to 4.3%. Combined with rising Jobless Claims, the weakening labour backdrop reinforces expectations that the Fed will deliver a 25-basis-point rate cut at next week's September 17-18 policy meeting. Traders are also pricing in a total of three cuts by the end of 2025.

In Canada, the economic backdrop remains fragile. The August jobs report revealed a loss of 65,000 jobs, pushing the unemployment rate up to 7.1%, its highest level since 2016 outside the pandemic period. Meanwhile, U.S. reciprocal tariffs are weighing on Canadian exporters and dampening business sentiment. A Reuters survey showed that a majority of economists expect the Bank of Canada (BoC) to also cut rates by 25 basis points on September 17, with some forecasting additional easing if labour market weakness persists.