USD/CAD drops to fresh session lows on dovish tilt at the Fed

USD/CAD is under pressure over the Federal Reserve event. The greenback has been sold off and commodities are rising as risk appetite flows through the markets. US stocks and oil have rallied as the Fed is expected to slow its pace of tightening in anticipation of slower jobs creation and softening in labour market conditions. At the time of writing, USD/CAD is trading at 1.2832, down some 0.4% on the day falling from a high of 1.2911 to a low of 1.2829 so far. 

Main takeaways from the statement

• The Fed says recent indicators of spending and production have softened.
• Fed says job gains have been robust, the unemployment rate has remained low.
• Fed says inflation remains elevated, reflecting pandemic-related imbalances, higher food and energy prices, and broader price pressures.

The Fed funds rate futures forecast 3.4% in December after a 75 basis point hike. That leaves 107 basis points of tightening for the remainder of 2022. 

Traders are pricing for a more dovish outcome for the September meeting as the Fed turns data-dependent. Investors are monitoring the Fed's chairman's presser who is coming across as cautiously optimistic for the US economy but is warning of a softer labour market. He sees a slowing in demand going forward in the economy.

Fed Powell key takeaways, so far

• Powell speech: We want to get to 3% to 3.5% by end-2022

• Powell speech: Time to go to a meeting-by-meeting basis

• Powell speech: Another unusually large increase could be appropriate at next meeting

• Powell speech: Labor market is extremely tight

• Powell speech: Growth in consumer spending has slowed significantly

• Powell speech: Another unusually large increase could be appropriate at next meeting

• Powell speech: Time to go to a meeting-by-meeting basis

• Powell speech: We want to get to 3% to 3.5% by end-2022

• Powell speech: Want to see demand running below potential for sustained period

The week has just got going

This all comes ahead of tomorrow's second quarter Gross Domestic Product which could turn the screw on the US dollar is it comes in lower than expected. ''We look for US output to have contracted for a second consecutive quarter following Q1's 1.6% AR retreat,'' analysts at TD Securities. ''We expect Q2 growth to be particularly impacted by a large drag from the inventories component. Despite likely registering a second consecutive decline, we don't think the US economy is in a recession. We also look for the ECI to post a 1.1% QoQ gain, a tad lower from Q1.''

On the other hand, a positive reading for growth in Q2 following the -1.6% QoQ saar plunge in Q1 would quash talk of recession, at least for the H1, analysts at Rabobank argued. ''That said, speculation will remain as to the size and extent of any potential downturn in 2023.''

On Friday,  the Fed’s favoured PCE deflator numbers will also be key.