USD/CAD retreated to near 1.3950 in early Asian trading on Tuesday. The U.S. dollar was lower against the Canadian dollar (CAD) on Friday evening following a surprise downgrade of the U.S. government’s credit rating and renewed escalation of trade tensions. Traders will be watching Canadian Consumer Price Index (CPI) inflation data due later in the day.

Moody's downgrade of the US sovereign rating from "AAA" to "AA1" and rising market expectations that the Federal Reserve (Fed) will soon begin to cut interest rates due to cooling US inflation have weakened the appeal of the US dollar (USD). The downgrade highlights growing concerns about fiscal deterioration and distortions caused by tariffs during President Trump’s tenure.

Limiting the dollar's upside, Federal Reserve officials remained cautious, calling for more clarity before committing to policy changes. According to the CME FedWatch tool, the market currently expects a nearly 91.6% chance that interest rates will remain at 4.25%-4.50% at the June meeting, while the probability of no change in July is 65.1%.

Meanwhile, lower crude oil prices could weaken the commodity-linked Canadian dollar. It’s worth noting that Canada is the largest exporter of oil to the United States, and lower crude prices tend to have a negative impact on the value of the Canadian dollar.

Nonetheless, a dovish outlook from the Bank of Canada (BoC) could weigh on the CAD and lead the pair to the downside, given the lackluster job growth and rising unemployment rate in April. Analysts at Capital Economics said U.S. tariffs are ultimately weakening Canada's economy, increasing the likelihood that the BoC will cut rates at an aggressive pace.