USD/CAD rises to near 1.3800 due to Fed's cautious policy outlook

• USD/CAD rises as the Fed signals a gradual approach to cutting borrowing costs in the coming months.
• The Fed's "dot plot" projects two additional rate cuts for this year.
• The Canadian Dollar could gain support as August Retail Sales estimates ease concerns of a sharp BoC rate cut cycle.

USD/CAD recovers its recent losses, trading around 1.3800 during the Asian hours on Monday. The US Dollar (USD) gains ground against its peers as the Federal Reserve (Fed) indicated no rush to lower borrowing costs quickly in the coming months after delivering a widely anticipated quarter-basis-point rate cut last week.

The US Dollar Index (DXY), which measures the value of the US Dollar against six major currencies, is gaining ground and trading around 97.70 at the time of writing. Traders will likely observe the upcoming Personal Consumption Expenditures (PCE) Price Index later this week, the Federal Reserve's preferred inflation gauge, which is expected to signal subdued price pressures.

Fed Chair Jerome Powell justified the cut rate after holding them steady since December amid growing signs of weakness in the labor market, along with concerns over tariff-driven inflation. Moreover, Powell also said that he doesn't feel the need to move quickly on rates and that the Fed is in a meeting-by-meeting situation regarding the outlook for interest rates. The Fed's rate projection, or the so-called "dot plot," showed a forecast of two more rate cuts this year.

The Canadian Dollar (CAD) may gain support as advance estimates showed August retail sales rising 1.0%, offsetting July's 0.8% drop and easing concerns of a sharp Bank of Canada (BoC) easing cycle. The Canadian central bank cut its benchmark rate by 25 bps to 2.50% last week as 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.