- USD/CAD regains footing as anticipation for another Bank of Canada interest rate cut mounts due to flat economic growth in August.
- US PCE core inflation remains at 2.7% in October, slightly above market expectations.
- US Initial Jobless Claims fell to 216K in the week ending October 25, below the market’s consensus.
The Canadian Dollar (CAD) remains under pressure following the Bank of Canada's (BoC) decision to aggressively cut interest rates by 50 basis points (bps) to 3.75%, a larger-than-expected move. The market anticipates further policy easing by the BoC at its next meeting in December, contributing to the CAD's weakness. The dovish bet also rose due to soft Canadian Gross Domestic Product (GDP) data released on Thursday.
The United States Personal Consumption Expenditures (PCE) Price Index for September came in slightly above market expectations, with core inflation remaining at 2.7%. However, the overall PCE growth rate moderated to 2.1% year-over-year, down from 2.2% in September. US Initial Jobless Claims unexpectedly fell to 216K in the week ending October 25, indicating a robust labor market. This was below the market consensus expectation of 230K.
Daily digest market movers: CAD weak due to soft GDP figures
- Flat economic performance in Canada, with GDP remaining stagnant in August and growing by a mere 0.1% in July, weighs on the Canadian Dollar .
- Subdued economic growth in Canada is expected to prompt the BoC to lower interest rates again in December.
- On the US front, the US PCE grew at a steady 2.1% yearly pace in October, down from September's 2.2%.
- Core inflation was maintained at 2.7%, above the market consensus expectation of 2.6%.
- US Jobless Claims unexpectedly fell to 216K in the week of October 25, indicating a robust labor market. 230K was expected.
- For Friday, economists estimate a modest 113K job creation figure in the October Nonfarm Payrolls number, lower than the previous month's 254K.
- The Unemployment Rate is projected to remain steady at 4.1%.
USD/CAD technical outlook: Pair trades sideways with bullish bias
The USD/CAD is trading sideways with a slightly bullish bias. The Relative Strength Index (RSI) is at 76, in the overbought area, suggesting that buying pressure is intense. The Moving Average Convergence Divergence (MACD) is flat, suggesting that buying pressure is taking a breather. This combination of signals indicates that the pair is poised to consolidate in the next several sessions.
Interest rates FAQs
Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.
Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.
Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.
The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.
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