Canadian Dollar Firms on Waning Fed Rate-Hike Bets and US-Canada Tariff Pause

The USD/CAD pair remained under pressure during European trading on Thursday, with the exchange rate last trading around 1.37884. Earlier, the pair touched the 1.3790 level. The US dollar's weakness stems from two main factors: the latest data showing cooling US inflation, which has led markets to significantly scale back bets on aggressive Fed rate hikes, and the news of a tariff pause between the US and Canada, which has eased trade tensions and reduced safe-haven demand for the greenback.

**Cooling Inflation Weakens Rate-Hike Expectations**

Recent US inflation data has shown signs of cooling, prompting investors to reassess the Fed's policy path. Market expectations for further aggressive rate hikes by the Fed have notably diminished, directly weighing on the dollar. Previously, the Fed's high-rate stance provided strong support for the dollar amid sticky inflation and a "no-landing" economic scenario, but that logic has now shifted. Traders are closely watching the US initial jobless claims data due later in the day for further confirmation of labor market conditions, which will be a key variable for the dollar's near-term direction.

**Tariff Pause Eases Trade Concerns**

The US-Canada tariff pause has provided an additional boost to the Canadian dollar. The easing of trade tensions has reduced concerns over the North American economic outlook, thereby diminishing safe-haven buying of the dollar while supporting the trade-sensitive loonie. This development, combined with the dollar's own weakness, has jointly pushed USD/CAD lower.

**Markets Await Upcoming Data Cues**

Looking ahead, market focus will shift to the upcoming US labor market data. If indicators such as initial jobless claims point to a stabilizing labor market, the Fed may maintain its hawkish stance on inflation, which could limit the dollar's downside. However, with rate futures already pricing in delayed rate cuts, any weaker-than-expected economic data could further intensify near-term downside pressure on the dollar.