USD/CAD holds gains near 1.3850 ahead of Michigan Consumer Sentiment Index

• USD/CAD edges higher despite rising bets of a Fed rate cut next week.
• The US Dollar could weaken as the odds of a half-point rate cut by the Federal Reserve increase.
• Canada's weak labor and inflation data strengthen expectations of an imminent BoC rate cut.

USD/CAD edges higher after registering gains of around a quarter of a percent in the previous session, trading around 1.3840 during the Asian hours on Friday. The pair gains ground as the US Dollar (USD) recovers its recent losses ahead of the University of Michigan Consumer Sentiment Index due later in the day.

However, the upside of the USD/CAD pair could be restrained as the US Dollar could face challenges as soft United States (US) jobs data outweighs hotter inflation, bolstering expectations of a Federal Reserve (Fed) 25 basis-point rate cut next week. The chance that the US central bank will cut by a half percentage point also edges higher.

US Consumer Price Index (CPI) climbed 2.9% year-over-year in August, as expected, but came in higher than 2.7% in July. The CPI inflation climbed to 0.4% MoM from a 0.2% increase prior. The core CPI, which excludes volatile food and energy prices, increased 3.1% on a yearly basis in August, matching the estimate. US Initial Jobless Claims rose to 263K, the highest since 2021, against the expected 235K and 236K prior (revised from 237K).

The USD/CAD pair may also draw support as the Canadian Dollar (CAD) could face challenges, as softer Canadian labor and inflation data boost market confidence in an imminent Bank of Canada (BoC) rate cut. Markets currently price about a 70% chance of a cut next week, with a weak CPI print likely to lift expectations further.