**USD/CAD Rises as Canadian CPI Disappoints and the U.S. Dollar Gains Strength**
*Based on reporting by Christian Borjon Valencia of FXStreet. Additional context and data sourced from Bloomberg, Reuters, and Statistics Canada.*
The USD/CAD currency pair continued its upward trajectory on Friday, November 17, 2023, driven by a combination of underwhelming Canadian inflation data and a resurgence in U.S. dollar strength. Traders and analysts closely watched these developments as they influence expectations for future monetary policy from both the Bank of Canada (BoC) and the U.S. Federal Reserve (Fed).
At the close of trading, USD/CAD was hovering near 1.3740, as the loonie (Canadian dollar) came under pressure following the release of the Canadian Consumer Price Index (CPI) figures for October. Meanwhile, a steady stream of hawkish rhetoric from U.S. Federal Reserve officials and solid U.S. economic data helped boost the greenback.
Below is a detailed analysis of the main drivers pushing the USD/CAD pair higher and what market participants can expect moving forward.
## Key Events and Data Driving USD/CAD Price Action
### Canadian CPI Fails to Meet Expectations
On Tuesday, Statistics Canada released its October CPI report, which showed inflation cooling more than economists had forecast, increasing speculation that the BoC might be done with its tightening cycle.
– **Headline CPI** slowed to 3.1% year-over-year in October, down from 3.8% in September.
– **Core CPI** readings, including CPI-trim and CPI-median, also showed softness, increasing by just 3.5% and 3.6% year-over-year, respectively—both showing deceleration.
– Month-over-month, CPI fell 0.1%, below the flat reading expected by economists.
The primary drivers behind the declining inflation were:
– A significant drop in gasoline prices, which fell 7.8% compared to September.
– Slower growth in food prices, although shelter costs remained persistently high, as mortgage interest and rent prices continued to increase.
These figures signaled that the inflation trajectory in Canada is aligning with the central bank’s goal to bring inflation back to its 2% target. As inflation cools, investors interpret this as a sign that the BoC is unlikely to raise rates further, especially given its previous emphasis on needing to see sustained upward pressure on core inflation to justify additional hikes.
### Bank of Canada Outlook: A Policy Pause?
Market expectations for further rate hikes from the BoC have now significantly diminished, especially in light of:
– Lagging economic growth indicators.
– Weak labor market data in recent months (Canada lost 17,500 jobs in October, and the unemployment rate rose to 5.7%).
– The dovish tone in the BoC’s recent policy meetings, where policymakers acknowledged growing risks of a slowdown and expressed concern about the lagged effects of previous rate hikes.
According to overnight index swaps (OIS) tracked by Bloomberg, the financial markets are currently pricing in negligible probability of another rate hike from the BoC in 2023 or early 2024.
Some economists are even predicting the BoC could pivot to a rate-cutting stance by the second half of 2024 if inflation continues to fall and economic conditions soften.
### U.S. Dollar Strength Driven by Fed Officials and Strong Data
While the Canadian dollar weakened, the U.S. dollar found renewed strength in recent sessions due to a combination of bullish Fed commentary and economic resilience.
Key factors supporting the USD include:
– Comments from Federal Reserve officials, such as San Francisco Fed President Mary Daly and New York Fed President John Williams, reiterating the Fed’s policy stance of “higher for longer.” While acknowledging the recent moderation in inflation, officials emphasized the need to remain vigilant and not rule out further tightening if price pressures reemerge.
– The U.S. Producer Price Index (P
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