USD/CAD pares Wednesday losses due to Fed’s rhetoric, despite a weak US dollar

• USD/CAD is gaining some 0.82% courtesy of Fed officials on Thursday.
• US unemployment claims keep heading lower, while Q2 GDP fell 0.6% as estimated.
• Fed’s Mester and Bullard estimate the Federal funds rate (FFR) to peak around 4.5%.
• The economy in Canada grew 0.1% MoM in July, exceeding estimations.

The USD/CAD marches firmly towards the 1.3700 figure after diving close to 0.90% on Wednesday, after hitting a two and half-year high at 1.3833. Sentiment shifts sour due to continuing Fed’s hawkish rhetoric, while US labor market data confirmed that the economy could survive further central bank tightening.

Therefore, the USD/CAD is trading at 1.3717, above its opening price, after hitting a daily low of 1.3604 at the time of writing.

Early, the US Department of Labor reported that unemployment claims reported for the last week ending on September 24 fell 197K, lower than estimates of 215K, a signal of the labor market resilience.

In the meantime, the US Department of Commerce revealed the Q2 final GDP reading, coming at -0.6%, as foreseen. It’s worth noticing that the government revised GDP data from 2016 Q4 to 2021 Q4, which showed that the economy’s recovery from the Covid-19 pandemic was more substantial than initially reported.

Earlier, some Fed officials led by Cleveland’s Fed President Loretta Mester and the St. Louis Fed President James Bullard crossed newswires.

Loretta Mester said that she still sees inflation as the economy’s main problem and commented that she does not see the case for slowing down. Furthermore, expects rates to peak around 4.6%. Later, St Louis Fed President James Bullard expressed that the Fed would need to keep rates “higher for longer” and added that real rates in the positive territory are an “encouraging sign.” However, he acknowledged the high recessionary risks while adding that the unemployment rate at 4.5% “would still be healthy for the economy.”

The US Dollar Index, a gauge of the buck’s value vs. a basket of peers, remained heavy, down by 0.35%, at 112.317, well below the YTD high at 114.778.

Aside from US dollar dynamics, Canada’s economy surged higher unexpectedly in July, as shown by data released by Statistics Canada. July’s GDP grew 0.1% MoM, higher than the 0.1% contraction estimated by analysts. “After a solid first half of the year, momentum appears to be slowing as multi-decade-high inflation and rapidly rising interest rates weigh on the economy,” according to sources cited by Reuters.

Given the backdrop that the Bank of Canada hiked rates 75 bps earlier in September, today’s data and high inflation would likely keep the BoC on the pedal to tame inflation.

USD/CAD Key Technical Levels