The USD/CAD pair is drawing in some sellers today after failing to break above the round level of 1.3600 yesterday. However, against the backdrop of dovish expectations for the Bank of Canada ahead of the Fed's decision, the downward potential remains limited. Traders prefer to stay on the sidelines, waiting for the results of the Federal Open Market Committee's (FOMC) two-day meeting. Only then will they position themselves for short-term direction. At the same time, expectations of more aggressive easing by the Federal Reserve are capping the U.S. dollar's recovery from the lowest level observed in 2023, hindering further gains for the currency pair.

According to CME Group's FedWatch tool, there is a 6% chance that the U.S. Central Bank will lower borrowing costs by 50 basis points later today. This probability increased after the publication of the U.S. Consumer Price Index (CPI) and Producer Price Index (PPI), which pointed to a deceleration in inflation. This overshadowed optimistic U.S. retail sales data, easing fears of an economic slowdown and prompting a short-covering rally in the U.S. dollar. In fact, according to the U.S. Census Bureau, retail sales in August rose by 0.1%, contrary to the expected drop of 0.2%. However, sales excluding autos fell short of expectations, increasing by only 0.1%.

Following these data releases, the yield on U.S. 10-year Treasury bonds surged from a 16-month low. However, due to dovish expectations for the Fed, the immediate market reaction was short-lived.

Expectations of a more significant rate cut by the Bank of Canada next month—by 50 basis points—have supported the view that the decline in USD/CAD is limited. These expectations were reinforced by signs of easing inflation. In fact, Canada's CPI showed the slowest growth since February 2021, and core measures also dropped to the lowest level in 40 months. This, combined with a slight decline in crude oil prices, is undermining the commodity-tied Canadian dollar, thereby supporting the currency pair.

From a technical standpoint, recent price movements within the range around the key 200-day simple moving average (SMA) represent a consolidation phase. Neutral oscillators on the daily chart suggest it's wise to wait for a sustained move in either direction.

A move beyond 1.3600 is likely to encounter resistance near the monthly high in the 1.3620–1.3625 area. Some subsequent buying could set the stage for an extension of the recovery from the multi-month low reached in August, allowing USD/CAD to reclaim the round level of 1.3700, with some intermediate hurdles near the 50 and 100 SMAs, currently positioned around 1.3665–1.3670.

On the other hand, the lower boundary of the trading range, or the 1.3565 zone, continues to act as immediate support. A convincing break below this zone will drive USD/CAD toward the psychological level of 1.3500, below which the decline could extend toward the multi-month low in the 1.3440 level. Ultimately, spot prices could drop to 1.3400 or even lower.