USD/CAD reaches near 1.3500 despite several headwinds

• USD/CAD recovers 1.3500 as US Dollar rises sharply.
• A steady rise in core US PCE inflation has forced traders to cut bets on high Fed rates.
• The Canadian economy expanded at a faster-than-expected 2.1% pace in the second quarter of this year.

The USD/CAD pair is climbing near the psychological resistance of 1.3500 in the Friday session in New York. Loonie asset gains as US dollar (USD) rises sharply, even as data on personal consumption expenditure (PCE) inflation in the United States (US) came in weaker than expected but rose steadily.

The US Dollar Index (DXY), which tracks the value of the greenback against six major currencies, is posting a fresh weekly high around 101.60. Market sentiment appears to be asset-specific, as the S&P 500 opened with strong gains, while risk-adverse currencies came under pressure.

Core data on PCE inflation, the Federal Reserve’s (Fed) favorite gauge, rose steadily at 2.6% but came in below estimates of 2.7%. On a month-on-month basis, core inflation rose in line with estimates and the previous release of 0.2%. Inflation data is unlikely to weigh on market expectations that the Fed will begin cutting interest rates at its September meeting, as policymakers appear more concerned about deteriorating labor market strength.

While signs of stiffening price pressures from inflation dampened bets backing the Fed to aggressively begin its policy easing cycle. According to the CME FedWatch tool, the probability of a 50 basis point (bps) interest rate cut fell to 30.5% from 36% a week ago.

Meanwhile, the Canadian dollar (CAD) underperformed the US dollar despite Canada’s Q2 gross domestic product (GDP) coming in surprisingly stronger than expected. The economy grew at a robust 2.1 percent pace versus estimates of 1.6 percent and the previous release of 1.8 percent, revised upward from 1.7 percent. However, market expectations for more interest rate cuts by the Bank of Canada (BoC) this year remain firm amid easing price pressures.