Canadian Dollar falls as US PCE inflation and GDP reinforce hawkish Fed expectations

• A US Dollar rebound following Wednesday’s losses draws buyers to USD/CAD.
• Third-quarter US GDP growth exceeds forecasts as PCE inflation comes in as expected.
• 2.50%: BoC keeps further tightening in play after its rate increase.

USD/CAD trades near 1.4007 at the time of writing. The pair has rebounded from an intraday low of 1.3970, drawing buying interest in Thursday’s American session. Traders are assessing fresh US economic figures that reinforce hawkish expectations for the Federal Reserve (Fed) and underpin the US Dollar (USD).

At around 102.25, the US Dollar Index (DXY) has recouped part of the previous day’s decline. The index measures the Greenback against a basket of six major currencies.

September’s headline Personal Consumption Expenditures (PCE) Price Index increased 0.5% MoM, compared with 0.3% in August. The annual rate accelerated from 3.4% to 3.6%, with both readings in line with forecasts. Core PCE, the Fed’s preferred inflation gauge, advanced 0.3% MoM as expected. That matched August’s figure, which was revised upwards from 0.2%. On an annual basis, core inflation ticked up from 3.0% to 3.1%, also meeting expectations.

An annualised expansion of 3.4% was recorded in the preliminary third-quarter Gross Domestic Product (GDP) estimate. US growth exceeded the 3.2% forecast and accelerated from the previous quarter’s 2.2%. In contrast, September’s increases in personal income and spending fell short of expectations.

The data come after Wednesday’s 10-2 Fed vote to hold interest rates at 3.75%-4.00%. Speaking at the post-meeting press conference, Chair Kevin Warsh emphasised that inflation was still elevated and reaffirmed the Fed’s commitment to price stability. On financial conditions, Warsh said that “while overall financial conditions are tighter, I’m unwilling and unable to call them tight.”

A December rate increase remains firmly in contention following his comments, with persistent inflation and better-than-expected growth reinforcing that prospect. Traders assign around an 83% probability to a hike, according to the CME FedWatch Tool.

In Canada, Wednesday brought a 25 basis point rate increase from the Bank of Canada (BoC), taking the policy rate to 2.50%. With the move already priced in, however, the Canadian Dollar (CAD) received little support from the decision.

Further tightening remains a possibility, according to Rabobank, which says the BoC’s latest policy statement “closes with the comment that ‘there could be a need to increase the policy rate further,’” suggesting the increase is unlikely to be a one-off. In response to that guidance, Rabobank’s Canada strategists “have therefore pencilled in another rate hike in December,” indicating that they expect policymakers may tighten further before year-end.