USD/CAD surges to a two-month high above 1.3500 on Fed hawkish minutes

• Despite concerns of overtightening, USD/CAD was buoyed by the Fed’s unanimous vote for a rate hike.
• US unemployment claims slightly below estimates at 239K, showcasing a resilient labor landscape.
• Atlanta Fed’s GDPNow model projects 5.8% growth for US Q3 2023, hinting at a potential rate hike in November.

USD/CAD advanced to fresh two-month highs on Thursday as investors digested the US Federal Reserve’s (Fed) latest monetary policy meeting minutes, which portray board members as committed to achieving the Fed’s inflation target. Even though some board members are worried about overtightening, all the participants voted for a rate hike. The USD/CAD is trading at 1.3546, almost flat.

Federal Reserve's commitment to inflation target and resilient US labor market data bolster the greenback against the Canadian dollar.

Wall Street finished the session with losses, while the greenback is trading almost flat, as shown by the US Dollar Index (DXY) exchanging hands at 103.437. Data from the US Bureau of Labor Statistics (BLS) reported a rise in unemployment claims last week, reaching 239K. This number was slightly below the estimated figure of 240K, indicating a resilient labor market. Simultaneously, the Philadelphia Fed disclosed its Manufacturing Index for August, which stood at 12, surpassing the anticipated -10 contraction that analysts had predicted.

On Wednesday, the Fed unveiled the minutes from its July meeting. Minutes revealed that Federal Reserve members still perceive the presence of upward risks related to inflation. This suggests that further tightening measures might be necessary. However, they also emphasized their commitment to factoring in upcoming data of the forthcoming meetings. Several regional Fed Presidents, including Bostic, Goolsbee, Harker, and Barkin, have expressed that the time has come to halt rate hikes.

In the wake of Wednesday’s data release, the Atlanta Fed GDPNow model has projected a growth rate of approximately 5.8% for the US Q3 2023 GDP. This is an increase from the 4.1% estimate recorded on August 8. Given these events, the swaps market has indicated an elevated likelihood of a 25 bps rate hike by the Federal Reserve at the impending November meeting.

Given a robust US economy, further upside is expected in the USD/CAD pair. Nevertheless, the recent inflation report in Canada can increase the odds of additional tightening by the Bank of Canada (BoC).

USD/CAD Price Analysis: Technical outlook

From a technical standpoint, the uptrend in the USD/CAD pair remains intact but is about to face solid resistance at 1.3600. A decisive break will expose the May 31 daily high of 1.3651, followed by the psychological 1.3700 mark. Conversely, if USD/CAD fails to reclaim 1.3600, the first support would be the  1.3500 mark, followed by the 200-day Moving Average (DMA) at 1.3451.