Canadian Dollar weakens as US PCE inflation and GDP back hawkish Fed bets

• USD/CAD finds buyers as the US Dollar regains ground after Wednesday’s decline.
• US PCE inflation meets forecasts, while third-quarter GDP growth beats expectations.
• The BoC leaves further tightening on the table after raising rates to 2.50%.

USD/CAD attracts buyers during American trading hours on Thursday as traders digest the latest US economic data, which keeps hawkish Federal Reserve (Fed) expectations intact and supports the US Dollar (USD). At the time of writing, the pair trades around 1.4007, recovering from an intraday low of 1.3970.

The US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, trades around 102.25, recovering some of the previous day’s losses.

The headline Personal Consumption Expenditures (PCE) Price Index rose 0.5% MoM in September, up from 0.3% in August, while annual inflation climbed to 3.6% from 3.4%. Both readings matched expectations. The core PCE Price Index, the Fed’s preferred measure of inflation, rose 0.3% MoM, matching forecasts and August’s reading, which was revised up from 0.2%. Annual core inflation edged up to 3.1% from 3.0%, as expected.

Meanwhile, the preliminary estimate of third-quarter Gross Domestic Product (GDP) showed the US economy expanded at an annualised rate of 3.4%, beating expectations of 3.2% and picking up from 2.2% in the previous quarter. However, Personal income and spending rose less than expected in September.

The figures follow Wednesday’s Fed decision to keep interest rates unchanged at 3.75%-4.00% in a 10-2 vote. At his post-meeting press conference, Chair Kevin Warsh stressed that inflation remained elevated and reiterated the Fed’s commitment to delivering price stability. Warsh noted, “While overall financial conditions are tighter, I’m unwilling and unable to call them tight.”

His remarks, alongside sticky inflation and stronger-than-expected growth, keep a December hike firmly in play. The CME FedWatch Tool shows traders pricing in an 83% chance of an increase.

Across the border, the Bank of Canada (BoC) raised interest rates by 25 basis points to 2.50% on Wednesday. However, the decision failed to give the Canadian Dollar (CAD) much of a boost as the move was already priced in.

Rabobank notes that the BoC’s latest policy statement “closes with the comment that ‘there could be a need to increase the policy rate further,’” underlining that the move is unlikely to be a one-and-done hike. Reflecting that guidance, the bank’s Canada strategists “have therefore pencilled in another rate hike in December,” signalling expectations that policymakers may yet deliver additional tightening before year-end.