**USD/CAD Dips as Markets Digest U.S. CPI and Canadian GDP Data**
*Adapted and expanded from original article by EconoTimes*
The U.S. dollar weakened against the Canadian dollar on the back of new U.S. inflation data and Canada’s recent GDP figures, as forex markets adjusted their expectations for central bank policy moves in both countries. The USD/CAD currency pair experienced downward momentum, suggesting increased support for the Canadian dollar while the U.S. dollar saw range-bound movement amid inflationary concerns and speculation on Federal Reserve strategy.
This shift comes at a crucial time when markets are closely watching macroeconomic indicators to reevaluate the path of interest rates in both the United States and Canada. Key data points released this week include the U.S. Consumer Price Index (CPI), which fueled speculation over the Federal Reserve’s potential monetary policy actions, and the Canadian gross domestic product (GDP), which showed moderate economic expansion.
### U.S. Consumer Price Index: Slower Inflation Triggers Dollar Softening
On Tuesday, the U.S. Bureau of Labor Statistics (BLS) released CPI data indicating that inflation slowed slightly in the United States for the month of April. The report beat expectations, which led traders to scale back their expectations for aggressive Federal Reserve interest rate hikes in the coming months.
**Key highlights from U.S. April CPI:**
– Headline CPI increased by 0.3% month-over-month, slightly below the forecasted 0.4%.
– Year-over-year CPI came in at 3.4%, a modest improvement from March’s 3.5%.
– Core CPI, which excludes volatile items like food and energy, rose 3.6% year-over-year, compared to an expected 3.7%.
– Month-over-month core inflation was also slightly cooler at 0.3%, in line with expectations.
The market reaction to the report was largely dovish. Reduced inflation pressures suggest that the Federal Reserve may have more leeway to delay interest rate hikes or even consider cuts later in the year, depending on the trajectory of inflation and labor market data.
As a result, the U.S. dollar lost momentum, pushing USD/CAD lower during the trading session.
### Fed Policy Outlook: Market Bets Shift Toward Rate Cuts
Following the CPI report, traders have adjusted their expectations for future Fed moves. The CME FedWatch Tool showed that market participants saw a higher probability of at least one 25-basis-point rate cut by the end of 2024.
**Factors influencing Fed rate outlook:**
– Softer inflation data increases pressure on the Fed to transition from a restrictive to a neutral policy stance.
– Slower job growth and moderating wage pressures signal reduced overheating risk in the labor market.
– Market sentiment now favors a more dovish trajectory as inflation gradually approaches the Fed’s 2% target.
This dovish pivot has weighed on the U.S. dollar, particularly against commodities-linked currencies like the Canadian dollar.
### Canadian GDP Delivers Better-Than-Expected Advance Estimate
In contrast to U.S. price data, Canada’s latest GDP figures surprised slightly to the upside, providing support for the loonie. Statistics Canada reported that the Canadian economy grew by 0.2% in February, aligning with analysts’ expectations.
Moreover, a flash estimate for March indicated another 0.3% increase in GDP, suggesting resilient economic activity in Canada and improving growth momentum.
**Key Highlights from Canada’s GDP report:**
– February 2024 GDP growth: +0.2% month-over-month.
– Growth driven primarily by service-producing industries, including finance, public administration, and educational services.
– Goods-producing sectors showed minimal growth, but oil and gas extraction contributed positively.
– March 2024 Flash Estimate: +0.3% GDP growth, reflecting greater-than-expected economic pickup entering Q2 2024.
Stronger GDP performance has reinforced expectations that the Bank of Canada (BoC)
Read more on USD/CAD trading.