US CPI bolsters hawkish Fed outlook, weighing on Canadian Dollar

October inflation data drive a US Dollar recovery, lifting USD/CAD.
An above-forecast US CPI reading prompts traders to price in a further Fed rate increase in December.
Labour market weakness in Canada leaves the BoC facing a tougher December rate decision.

USD/CAD trades around 1.4167 at the time of writing, up 0.34% on the day. The pair reaches its highest since 16 October on Tuesday, supported by a US Dollar (USD) rally after US inflation exceeded forecasts. The Canadian Dollar (CAD) faces additional pressure from lower oil prices as hopes grow for US-Iran diplomacy.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

October’s US Consumer Price Index (CPI) increased 0.4% MoM, exceeding the 0.3% forecast while slowing from September’s 0.6%. Excluding food and energy, core CPI advanced 0.3%, matching September’s pace and surpassing expectations of 0.2%. No annual CPI figures for October were published by the Bureau of Labor Statistics (BLS) because of last year’s government shutdown.

With the inflation release strengthening expectations of a December rate increase by the Federal Reserve (Fed), the US Dollar recovers roughly half of its losses from the previous day. From an intraday low of 101.49, the US Dollar Index (DXY) advances towards 102.00.

Ahead of the data, Fed Governor Christopher Waller said a half-point rate increase in December might be necessary if October core CPI registered “around 0.3% or higher.” According to the CME FedWatch Tool, traders now put the probability of a 25-basis-point increase at 85.3%, with a 14.7% probability of a 50-basis-point rise.

Geopolitics could prove decisive for the policy outlook, according to analysts at MUFG/BTMU. They argue that “if there is further progress towards a US-Iran deal to end the conflict, it would help to sustain lower energy prices and ease pressure on major central banks, including the Fed, to keep hiking rates.”

Down more than 15% so far this month, West Texas Intermediate (WTI) retreats towards $84 a barrel, its lowest since 31 August. Following talks with Qatar’s prime minister at the White House on Monday, US President Donald Trump said there was “positive momentum” towards ending the war with Iran.

Lower oil prices can reduce Canada’s export earnings and pressure the Loonie, given the country’s position as a major crude exporter. At the same time, uncertainty surrounds a December rate increase by the Bank of Canada (BoC). The central bank must balance efforts to curb inflation against support for a deteriorating labour market.

Employment in Canada declined by 4.7K in October, rather than the forecast increase of 13.6K. Statistics Canada’s figures, released on Friday, marked a third consecutive month of job losses.

US Dollar: Today’s Currency Moves

Today’s percentage moves in the US Dollar (USD) against the major currencies listed appear in the table below. The Australian Dollar recorded the largest decline against the US Dollar.

	USD	EUR	GBP	JPY	CAD	AUD	NZD	CHF
USD		0.33%	0.46%	0.51%	0.33%	0.73%	0.40%	0.58%
EUR	-0.33%		0.11%	0.16%	-0.01%	0.39%	0.07%	0.25%
GBP	-0.46%	-0.11%		0.04%	-0.11%	0.28%	-0.05%	0.14%
JPY	-0.51%	-0.16%	-0.04%		-0.17%	0.23%	-0.10%	0.08%
CAD	-0.33%	0.00%	0.11%	0.17%		0.40%	0.06%	0.25%
AUD	-0.73%	-0.39%	-0.28%	-0.23%	-0.40%		-0.33%	-0.14%
NZD	-0.40%	-0.07%	0.05%	0.10%	-0.06%	0.33%		0.19%
CHF	-0.58%	-0.25%	-0.14%	-0.08%	-0.25%	0.14%	-0.19%

Percentage movements between major currencies are displayed in the heat map. Select the base currency in the left-hand column and the quote currency in the top row. For instance, choosing the US Dollar on the left and reading across to the Japanese Yen gives the percentage change for USD (base)/JPY (quote) in the corresponding cell.