USD/CAD holds gains above 1.3750 due to upbeat US inflation outlook

• USD/CAD appreciates as strong inflation projections curb expectations for more aggressive FOMC rate cuts.
• The Fed cut the funds rate by 25 basis points and signaled an additional 50 basis points of easing before year-end.
• The BoC lowered its benchmark rate by 25 bps, noting that the balance of risks has shifted since July.

USD/CAD gains ground for the second successive session, trading around 1.3770 during the Asian hours on Thursday. The pair appreciates as the US Dollar (USD) advances due to strong inflation projections that have curbed expectations of more aggressive Federal Open Market Committee (FOMC) rate cuts. The Federal Reserve's (Fed) projection showed that policymakers see inflation ending this year at 3% at the median, well above the central bank's 2% target.

The Federal Reserve (Fed) lowered the funds rate by 25 basis points (bps), marking the first cut of the year, and signaled a further 50 bps of easing before year-end, slightly above its June projections. The FOMC's median projections signaled two additional rate cuts this year, but stronger forecasts for real growth and employment, along with upward revisions to core inflation, cast doubt on the scope for deeper cuts in the following year.

Fed Chair Jerome Powell pointed to growing signs of weakness in the labor market to explain why officials decided it was time to cut rates after holding them steady since December amid concerns over tariff-driven inflation.

The Bank of Canada (BoC) also cut its benchmark rate by 25 bps to 2.50% on Wednesday. The Canadian central bank said in its Monetary Policy Statement that three key developments had shifted the balance of risks since July. The labor market has weakened further, underlying inflationary pressures have eased, and Canada's withdrawal of most retaliatory tariffs has lowered upside risks to inflation.