USD/CAD depreciates after registering gains in the previous day, trading around 1.4200 during Asian hours on Thursday. The currency pair lost ground as the US Dollar (USD) struggled while investors continued to evaluate the Federal Reserve’s (Fed) monetary policy outlook in the wake of stronger-than-expected inflation data.
The Bureau of Labor Statistics (BLS) reported on Wednesday that the US Consumer Price Index (CPI)—a broad measure of goods and services costs across the economy—climbed 0.6% month-over-month in September, bringing the 12-month headline rate to 3.7%. Both metrics came in higher than economists' forecasts of 0.6% and 3.6%, respectively. Meanwhile, core CPI (which strips out volatile food and energy components) advanced 0.3% for the month and rose 2.6% on an annual basis, exceeding market estimates of 0.2% and 2.5%.
This hotter-than-anticipated inflation report reinforced expectations for a potentially more hawkish Federal Reserve, bolstering arguments for an interest rate hike at the upcoming Federal Open Market Committee (FOMC) meeting on October 27–28. Following the data release, futures traders raised the probability of a rate hike at the late-October meeting to approximately 31.6%, according to CME Group’s FedWatch tool.
Treasury curve bear flattens as stronger data lifts Fed hike risk
According to TD Securities, the US rates market has responded to the latest data with a pronounced move, as "Treasuries bear flattened sharply as the market penciled in more rate hikes." The firm notes that, despite the repricing of Fed expectations, "we don't expect an October hike despite a sharp increase in pricing," but cautions that "the stronger data hints at the risk of more hikes in the coming months, maintaining upward pressure on rates."
Despite the USD's weakness, downside pressure on the USD/CAD pair could remain limited as the commodity-linked Canadian Dollar (CAD) faces its own headwinds from falling oil prices. Crude prices declined following news that the Trump administration is considering easing sanctions on "shadow fleet" vessels that transport oil and petroleum products from sanctioned nations such as Russia, Iran, and Venezuela.
A US official confirmed Wednesday that the proposed shift is aimed at lowering record-high global freight rates. The policy discussions come shortly after President Donald Trump temporarily lifted sanctions on Russian diesel fuel—a decision that sparked sharp criticism from Ukrainian President Volodymyr Zelenskiy, European allies, and several Senate Republicans.
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