• USD/CAD hits fresh two-week lows below 1.4200 after Wednesday’s rejection at the 1.4300 area.
• Lower US Treasury yields and dovish comments from Fed officials have hampered the US Dollar.
• Fed officials Bowman and Daly hint at a monetary policy pause in October.

The Canadian Dollar (CAD) has shown a sharp recovery against the US Dollar (USD) over the last few sessions, with the USD losing momentum, weighed by lower US Treasury yields and dovish comments by Federal Reserve (Fed) officials. The USD/CAD pair is trading at fresh two-week lows around 1.4195 as of writing, after being rejected at the1.4300 area for the second time in the last two weeks.

The US Dollar rallied on Wednesday as US Consumer Price Index (CPI) figures confirmed that the impact of higher Crude prices stemming from the Middle East conflict is spreading beyond energy, raising concerns about the feared second-round effects. Inflation figures boosted speculation that the Federal Reserve might hike interest rates at the October meeting, but Fed officials cooled those hopes, triggering a significant reversal in US Treasury yields and the US Dollar. 

Fed officials signal cautious post-hike pause

Federal Reserve Vice Chair for Supervision Michelle Bowman agreed that the bank might have to hike interest rates further but hinted at a pause in October to assess how financial markets and the economy evolve after September’s rate hike.

Bowman delivered an overall hawkish speech, scoring 6.2 on the FXS Speechtracker, modestly above the 5.9 historical average, indicating a slightly firmer tone relative to the established baseline. Nevertheless, the urge for a more cautious, data-dependent stance clashed with market expectations of a more aggressive approach, with back-to-back interest rate hikes.

In a similar vein, San Francisco Fed President Mary Daly reiterated that more rate hikes are “likely” but warned that the timing is still under consideration. Daly added that it is still uncertain if “inflation will ease as shocks fade or worsen if shocks continue,” and affirmed that it is “better to be thoughtful and deliberate.”  

The Canadian Dollar, on the other hand, is facing moderate headwinds as Crude prices retreat from recent highs, which keeps the Loonie from appreciating further. In the calendar this week, Canada’s Manufacturing Sales and Wholesale Sales figures might provide some fundamental guidance later on Thursday. The highlight of the week, however, is likely to be the Bank of Canada (BOC) Tiff Macklem’s comments at a panel discussion in the International Monetary Fund (IMF) meeting in Bangkok, Thailand, on Friday.