The USD/CAD pair is currently facing pressure as a result of the recent US PCE Inflation and Canadian GDP report. While the monthly US core PCE inflation reading was soft, other elements of the report matched estimates. Canada’s Q1 GDP also grew at a slower pace of 1.7% on an annualized basis.
The Personal Consumption Expenditure Price Index (PCE) report for April from the United States Bureau of Economic Analysis (BEA) was in line with market expectations. The core PCE inflation, which is the Federal Reserve’s preferred inflation gauge, grew parallel to estimates. The monthly underlying inflation data also rose moderately by 0.2%, consistent with the pace required to bring inflation down to the 2% target set by the Federal Reserve.
Despite the inflation data, it is unlikely to boost expectations for the Fed to decrease interest rates starting from the September meeting. This scenario historically favors the US Dollar, however, the US Dollar Index (DXY) fell to 104.40. The US Dollar’s appeal has already been uncertain due to downwardly revised Q1 GDP data, with the economy expanding at a slower pace of 1.3% from preliminary estimates of 1.6%.
The Canadian Dollar, on the other hand, has been performing relatively stronger against the US Dollar but has weakened against other major currencies. This is due to weak GDP figures for different timeframes. The Canadian economy grew by 1.7% on an annualized basis, missing estimates of 2.2% and the Bank of Canada’s forecast of 2.8%. On a monthly basis, the economy remained stagnant in March.
The weak economic growth in Canada signals a need for more stimulus, which could lead to the adoption of an expansionary policy stance by the central bank. This could deepen hopes of the Bank of Canada initiating the policy normalization process starting from the June meeting. The outlook for the USD/CAD pair remains vulnerable near 1.3630, with uncertainty surrounding the US Dollar and Canadian Dollar based on the recent economic data and reports.