The Federal Reserve begins its interest rate cut cycle, and USD/CAD strengthens slightly above 1.3600

In early Asian trading on Thursday, USD/CAD strengthened slightly above 1.3600. Investors will focus on U.S. weekly jobless claims, the Philadelphia Fed manufacturing index and existing home sales due later in the day.

The Federal Open Market Committee (FOMC) decided to lower the federal funds rate to a range of 4.75% to 5%, marking the first rate cut by the Federal Reserve in more than four years. "This decision reflects our growing confidence that through an appropriate readjustment of the policy stance, moderate growth and inflation can be achieved," Fed Chairman Powell said at a press conference after the monetary policy meeting. The labor market remains strong despite the continued decline to 2%.”

The U.S. dollar (USD) started lower following the release of the Federal Reserve decision, but reversed course after Chairman Jerome Powell concluded his press conference. In addition, Federal Reserve (Fed) policymakers also revised their quarterly economic forecasts, raising the median unemployment rate forecast for the end of 2024 to 4.4% from 4% in June. Officials again raised their long-term federal funds rate forecast to 2.9% from 2.8%.

The Bank of Canada is assessing upside and downside risks to the economy to determine the pace of interest rate cuts, according to a summary of its deliberations. Inflation data on Tuesday showed Canada's consumer price index (CPI) rose at an annualized rate of less than 2 per cent in August, already meeting the central bank's target.

Markets put the chance of a 50 basis point rate cut in October at nearly 46%. Weaker inflation and rising speculation of further rate cuts from the Bank of Canada are likely to weigh on the Canadian dollar (CAD) and support the USD/CAD pair in the short term.