USD/CAD drifts higher above 1.4050 as Canadian CPI inflation looms

• USD/CAD strengthens to around 1.4060 in Tuesday's early European session. 
• Business sentiment improved, but firms are still cautious amid US tariffs, the BoC noted. 
• BoC rate cut bets and lower crude oil prices weigh on the Loonie. 

The USD/CAD pair gathers strength to near 1.4060 during the early European trading hours on Tuesday. The Canadian Dollar (CAD) edges lower against the US Dollar (USD) as oil prices fall and the Bank of Canada (BoC) Business Outlook Survey supports expectations for another interest rate cut this month.

Canadian firms feel conditions are slightly better than earlier in the year, but they are unlikely to boost investments or hiring given the dampening effect of US tariffs, according to a BOC survey on Monday. The survey also suggested that inflation expectations are relatively well contained, and the report supports another 25 basis points (bps) rate cut from the Canadian central bank next week. This, in turn, undermines the CAD and creates a tailwind for the pair. 

Money markets are now pricing in nearly a 77% chance of a 25 bps rate reduction in the October meeting, according to Reuters. Last month, the BoC lowered its benchmark rate to a three-year low of 2.50%.

Additionally, Crude oil price declines to a five-month low amid concerns over excess supply, which weigh on the commodity-linked Loonie. It's worth noting that Canada is the largest oil exporter to the US, and lower crude oil prices tend to have a negative impact on the CAD value.

Traders will keep an eye on the Canadian Consumer Price Index (CPI) inflation data for September later on Tuesday. The headline CPI is expected to see an increase of 2.3% YoY in September, compared to 1.9% in August. Any signs of a hotter-than-expected inflation could boost the CAD in the near term. 

The US federal government shutdown has entered its fourth week with no clear end in sight, marking the third-longest funding lapse in modern history. The GOP-backed bill failed to pass the Senate for the 11th time on Monday. Concerns that the extended US government shutdown could impact economic activity could drag the USD lower.