USD/CAD steadies as Canadian Dollar underperforms despite softer Greenback

• USD/CAD steadies above 1.3800 as the Canadian Dollar underperforms despite a weaker Greenback.
• The BoC cut rates to 2.50% last week, its eighth reduction since September 2023, and signaled readiness to ease further if risks rise.
• Fed's Bostic said on Monday he sees little reason to cut further for now, penciling in only one reduction in 2025.

The Canadian Dollar (CAD) trades on the back foot against the US Dollar (USD) on Monday, with USD/CAD hovering around 1.3808 at the time of writing. The advance comes even as the Greenback trades lower against most of its major peers, as traders continue to assess the monetary policy outlook following interest rate cuts by both the Federal Reserve (Fed) and the Bank of Canada (BoC) last week.

At the same time, Crude Oil prices extend their retreat on Monday, with West Texas Intermediate (WTI) slipping toward $61.50 per barrel. Canada, as a major energy exporter, remains highly sensitive to Oil price fluctuations, and lower Oil prices typically reduce demand for the Loonie.

Last week, the BoC cut its overnight rate by 25 basis points to 2.50%. The latest move marked the BoC's eighth rate cut since the policy rate peaked at 5.25% in September 2023, underscoring the extent of the Bank's easing cycle amid weakening growth and moderating inflation.

In its Monetary Policy Statement, the BoC said that three key developments had shifted the balance of risks since July. The labour market has softened further, underlying inflation pressures have diminished, and Canada's removal of most retaliatory tariffs has reduced upside inflation risks.

Governor Tiff Macklem emphasized the Bank is prepared to ease further "if risks rise." Economists at several major banks, including TD and CIBC, expect at least one more reduction before year-end. According to Reuters, the overnight index swap market is pricing roughly a 40% chance of another cut in October and around a 75% probability by December.

While the Fed also delivered a 25 basis point cut last week, Chair Jerome Powell struck a more cautious tone, stressing that policy decisions remain data-dependent. The central bank's updated dot plot signaled the likelihood of two more reductions by year-end, reinforcing expectations of a gradual approach.

Atlanta Fed President Raphael Bostic told the Wall Street Journal on Monday that he sees little reason to cut rates further for now, noting he penciled in only one reduction for all of 2025. He described the current environment as one of the most difficult periods for policymakers, with risks rising on both sides of the mandate, while emphasizing that he does not believe the labor market is in crisis.