USD/CAD Volatile at 1.3778 Amid Economic Data

Key Points:

• Fed rate decision and Powell’s remarks anticipated; pivotal for USD/CAD volatility.
• Canadian GDP underperforms February growth at 0.2%, below expectations, hints at possible rate cuts.
• Employment costs rise and may push inflation, strengthening the dollar.

The USD/CAD currency pair reached 1.3778 during the early Asian trading hours on Wednesday, suggesting slight volatility due to various economic releases and central bank expectations. The focus is particularly on recent economic indicators from both Canada and the US, which suggest differing trajectories for the two economies.

Canada GDP Growth Slows to 0.2%, Misses 0.3% Forecast.

Canada’s GDP grew by 0.2% in February, falling short of the expected 0.3%. This was significantly lower compared to the previous growth of 0.5%. This slowdown is considered negative for the Canadian dollar (CAD), as it signals a weaker economic momentum than anticipated. This underperformance is pivotal as it has set the stage for the Bank of Canada’s monetary policy, with speculations about a potential rate cut by June to counteract the sluggish economic growth observed in the first quarter.

Employment Costs in the US Exceed Projections at 1.2%

Conversely, the US economy has presented mixed signals that lean towards a stronger dollar. The Consumer Confidence Index in April dropped to 97.0, marking the lowest level since July 2022, which could hint at cautious consumer sentiment. Significantly, the Employment Cost Index for the first quarter of 2024 surpassed expectations, reaching 1.2% year-on-year against a predicted 1.0%. This increase indicates rising employment costs. Consequently, it may lead to inflationary pressures, strengthening the USD outlook.

USD/CAD: Anticipation for Fed’s Rate Hold

This week, financial markets anticipate the US Federal Reserve’s crucial interest rate decision, expected to maintain current rates. The focus will shift to Federal Reserve Chairman Jerome Powell’s press conference, where he might offer further insights into future monetary policy. Several important events are on the horizon. These include the release of the US ADP Employment Change and ISM Manufacturing PMI. Additionally, the Canadian S&P Global Manufacturing PMI will also be released. Together, these could increase volatility in the USD/CAD pair.

USD/CAD Weakens as Oil Prices Drop, Rate Cut Looms

The oil price decline has increased pressure on the CAD due to Canada’s role as the US’s top crude oil exporter. The commodity price trend indicates a downturn. Coupled with the potential for a rate cut from the BoC, this suggests a bearish outlook for the CAD in the near term. On the other hand, the “higher-for-longer” rate narrative in the US continues to support the USD. This is particularly true as the likelihood of a Fed rate cut in September has fallen. According to the CME FedWatch Tool, it has decreased from 60% to 44%.