USD/CAD extends gains beyond 1.3850 as markets turn cautious

• The US Dollar rallies for the third consecutive day, reaching levels right above 1.3850.
• A cautious market mood amid ongoing geopolitical risks is underpinning demand for the safe-haven USD.
• BoC Governor Tiff Macklem warned about systemic risks to the Canadian economy.

The US Dollar rallies for the third consecutive day against its Canadian counterpart, hitting its highest price in nearly two weeks at levels beyond 1.3850. In the absence of key data, investors' caution amid ongoing geopolitical risks is giving the safe-haven USD a competitive advantage on Wednesday.

On Tuesday, Fed Chairman Jerome Powell highlighted the challenges ahead for the Fed to support a softening labor market without boosting inflation and warned that further interest rate cuts are not guaranteed.

The market anticipates further easing by the Fed and the BoC

The market, however, paid little attention to those comments. Futures markets keep pricing more than 90% chances that the US central bank will cut rates by a quarter point in November, and almost 80% chances of another 25 bps cut in December.

On the macroeconomic front, business activity data supported that view. The US preliminary Manufacturing PMI eased to 52 in September from 53 in August, while the services sector's activity eased to 53.9 from 54.5 in the previous month. Both readings fell in line with the market expectations and, therefore, the impact on the US Dollar was moderate.

In Canada, BoC Governor, Tiff Macklem, warned about further systemic risks to the economy amid shifts in global trade and financial flows and the weakening US Dollar. The Bank of Canada cut rates to a three-year low of 2.5% last week, and the market is anticipating further cuts this year, following the track of the Fed. This is keeping the Canadian Dollar's upside attempts limited.