USD/CAD rebounds to near 1.3750 ahead of policy meeting from Fed, BoC

• USD/CAD appreciates ahead of the interest rate decision from both nations on Wednesday.
• The likelihood of multiple Fed rate cuts this year strengthens after upbeat US Retail Sales data.
• The Canadian Dollar may regain its ground as August inflation data boost the BoC's cautious mood.

USD/CAD gains ground after two days of losses, trading around 1.3750 during the Asian hours on Wednesday. The pair appreciates as the US Dollar (USD) holds ground ahead of the US Federal Reserve (Fed) policy decision.

Traders expect the US central bank to deliver a 25-basis-point cut on Wednesday, the first reduction since December 2024, with some still hoping for a greater 50-basis-point cut. The Fed's Summary of Economic Projections (SEP), the 'dot plot,' will be eyed, where each member of the Federal Open Market Committee (FOMC) expects the federal funds rate in the near future.

The upside of the USD/CAD pair could be limited as the US Dollar (USD) could weaken amid rising likelihood of multiple Federal Reserve (Fed) interest rate cuts, with strong retail sales and labor data outweighing hotter inflation. Additionally, Morgan Stanley and Deutsche Bank projected 25-basis-point reductions at each of the Fed's meetings in September, October, and December.

US Retail Sales increased by 0.6% month-over-month in August, following the 0.6% increase (revised from 0.5%) recorded in July, and came in better than the market expectation of 0.2%. Retail Sales Control Group and Retail Sales ex Autos both rose 0.7%, against the expected 0.4% increase. The sales report showed resilient consumer spending despite sticky inflation and a softening labor market.

The Canadian Dollar (CAD) finds support as domestic inflation data boost the cautious sentiment surrounding the Bank of Canada's (BoC) policy outlook. Alongside signs of economic resilience, the latest inflation figures support a longer restrictive stance and reduce the odds of rapid easing. Markets now expect only a modest 25-basis-point cut on Wednesday.

Headline CPI rose to 1.9% in August from 1.7% in July, missing the 2.0% forecast and staying below the BoC's 2% midpoint for a fifth straight month. However, trimmed-mean core CPI, its preferred inflation gauge, held near 3.0%, highlighting persistent underlying pressures once volatile items are excluded.