Canadian Dollar gains as US inflation cools Fed October rate hike bets

  • USD/CAD retreats on Wednesday after US inflation data came in below expectations.
  • Core PCE inflation remained at 3% in August, below the 3.3% forecast, while private-sector employment rose more than expected in September.
  • Markets scale back bets on an October rate hike but increase expectations for a move in December.

USD/CAD declines 0.08% on Wednesday and trades around 1.4180 at the time of writing, after touching a daily low of 1.4155 in the wake of the US inflation data. The pair recovers part of its losses as investors reassess the timing of a potential further tightening by the Federal Reserve (Fed).

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

The US Dollar (USD) initially came under selling pressure following the release of the United States (US) Personal Consumption Expenditures (PCE) Price Index. Annual PCE inflation remained unchanged at 3.4% in August, below the 3.7% expected by markets. July's reading was also revised lower to 3.4% from 3.7%.

The core PCE Price Index, which excludes volatile food and energy components and is closely watched by the Fed as a measure of underlying inflation, remained steady at 3% YoY, below the 3.3% forecast. July's reading was also revised down to 3% from the previously reported 3.3%. On a monthly basis, headline PCE rose 0.3%, while core PCE increased 0.2%.

The softer-than-expected inflation figures add to stronger economic data. Automatic Data Processing (ADP) reported earlier that the US private sector added 90K jobs in September, exceeding expectations for a 70K increase and accelerating sharply from the 36K jobs created in August after revision.

US economic growth also delivered an upside surprise. Annualized Gross Domestic Product (GDP) growth for the second quarter was revised higher to 2.2%, from a previous estimate of 1.5% and against expectations for an unchanged 1.5% reading. The revision means that economic growth accelerated from the 2.1% pace recorded in the first quarter, rather than slowing as previously estimated.

Softer inflation triggers a shift in expectations regarding the timing of the Fed's next rate hike. According to the CME FedWatch tool, markets now assign around a 37% chance to a rate increase in October, down from nearly 51% on Tuesday and 71% a week earlier.

This repricing weighs on the US Dollar in the short term. The US Dollar Index (DXY), which tracks the Greenback against a basket of six major currencies, loses 0.21% on Wednesday to trade around 101.20, after touching an intraday low of 101.03 immediately following the PCE release.

However, investors are not abandoning expectations for further monetary tightening. Instead, they are shifting those expectations toward the end of the year. The chance of a rate hike in December now stands at 57.5%, up from 49.4% a day earlier. This shift in the expected timing of the Fed's next move could limit downside pressure on the US Dollar and partly explains USD/CAD's rebound from its daily low.

USD/CAD technical analysis

Chart Analysis USD/CAD


In the one-hour chart, USD/CAD trades at 1.4176, retaining a modest bullish bias as it holds above both the 100-period simple moving average (SMA) at 1.4165 and the 200-period SMA at 1.4106. The cluster of nearby underlying levels, together with the pair’s position over the day’s open at 1.4193, suggests an upwardly biased consolidation despite the Relative Strength Index (14) slipping toward a neutral 42 area, hinting at easing upside momentum rather than outright selling pressure.

On the topside, immediate resistance emerges at the horizontal barrier around 1.4200, where a sustained break would open the way for a stronger recovery leg. On the downside, initial support is seen at the recent pivot near 1.4175, followed by the 1.4150 and 1.4133 floors, while deeper demand is located around the 1.4106/1.4100 zone and then 1.4025, 1.3974 and 1.3945 if corrective pressure accelerates.

(The technical analysis of this story was written with the help of an AI tool. Know more.)