US PCE inflation and GDP bolster hawkish Fed bets, weighing on Canadian Dollar

• A recovery in the US Dollar following Wednesday’s losses draws buyers to USD/CAD.
• US PCE inflation comes in as expected, but third-quarter GDP growth exceeds forecasts.
• After lifting rates to 2.50%, the BoC keeps the door open to additional tightening.

The latest US economic releases sustain hawkish expectations for the Federal Reserve (Fed), supporting the US Dollar (USD) and drawing buyers to USD/CAD during Thursday’s American session. Having rebounded from an intraday low of 1.3970, the pair is trading near 1.4007 at the time of writing.

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 by 0.5% MoM, compared with 0.3% in August, as the annual inflation rate accelerated from 3.4% to 3.6%. Both figures were in line with forecasts. Excluding volatile items, the core PCE Price Index, the Fed’s preferred inflation gauge, advanced by 0.3% MoM. This matched expectations and August’s figure, which was revised upwards from 0.2%. On an annual basis, core inflation ticked up from 3.0% to 3.1%, in line with expectations.

The preliminary third-quarter Gross Domestic Product (GDP) estimate put annualised US economic growth at 3.4%, above the 3.2% forecast and up from 2.2% in the preceding quarter. By contrast, September’s increases in personal income and spending fell short of expectations.

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

A December rate rise remains firmly on the table following Warsh’s comments, with persistent inflation and growth above forecasts reinforcing that prospect. Traders assign roughly an 83% probability to an increase, according to the CME FedWatch Tool.

In Canada, Wednesday brought a 25 basis point interest rate increase from the Bank of Canada (BoC), taking the rate to 2.50%. The Canadian Dollar (CAD) gained little support from the decision, however, as markets had already priced in the move.

Further tightening remains a possibility, Rabobank notes, pointing out that the BoC’s latest policy statement “closes with the comment that ‘there could be a need to increase the policy rate further,’” suggesting this is unlikely to be a single, isolated rate rise. In response to that guidance, the bank’s Canada strategists “have therefore pencilled in another rate hike in December,” reflecting expectations that policymakers may tighten policy again before the year ends.