USD/CAD has declined slightly following the US PCE inflation data for January and Canadian GDP data for Q4 and December. The US core PCE inflation rate decreased to 2.6% from 2.8% in December, while the Canadian economy grew at an annualised rate of 2.6%.
Despite the slight drop, the USD/CAD pair remains around 1.4430 during North American trading hours. The US core PCE inflation, which omits food and energy costs, revealed a monthly increase of 0.3%, up from 0.2% previously.
The Canadian GDP results were mixed, with a growth rate of 2.6%, surpassing the 2.2% growth in the previous quarter and higher than the expected 1.9%. In December, growth was reported at 0.2%, matching November’s decline, and below the anticipated 0.3%.
Overall, the outlook for the Canadian Dollar remains weak, especially after the announcement of 25% tariffs by US President Donald Trump on Canada and Mexico, set to take effect on March 4.
This minor weakening in the exchange rate suggests that traders are responding more to the inflation data from the United States than to Canada’s mixed GDP figures. A 0.3% monthly increase in core PCE inflation, while not drastic, indicates a steady rise in prices. That contributes to expectations regarding Federal Reserve policy, particularly in relation to interest rates.
The 2.6% annualised GDP growth in Canada, though better than estimates, attaches a few added layers to market sentiment. A stronger-than-expected expansion would usually support the local currency. However, December’s flat performance underlines a lack of consistent economic momentum. That could mean investors will be hesitant before assuming any broad strength in the Canadian Dollar.
Moreover, tariffs announced by Donald put additional pressure on market positioning. A 25% levy on Canadian and Mexican goods entering the United States will likely drive concerns over trade and economic performance in both countries. Even though there’s no immediate reaction in foreign exchange markets, it is something participants will need to factor in, particularly if trade tensions escalate further past March.
For traders involved in derivatives that hinge on the movement of this pair, it’s worth keeping a close watch on whether the upward trajectory in US inflation remains steady in the next release. If upcoming data reinforces higher price pressures, adjustments in forward-looking rate predictions may lead to fluctuations in the pair. We would also monitor how market sentiment evolves regarding Canadian GDP in the next couple of months. A weaker Canadian Dollar might persist if economic data remains inconsistent and trade concerns intensify.
At present, with the exchange rate hanging around 1.4430, it’s evident that neither side is making a decisive move. The next shifts will depend on whether traders place greater weight on inflation trends in the United States or on Canada’s economic trajectory. Given that previous GDP outcomes have been mixed, it will be just as necessary to examine domestic indicators in Canada, including employment data, before assuming any lasting movement in the pair.
