In a week marked by important economic data releases, the USD/CAD currency pair experienced a minor decline following the release of key economic indicators from both the United States and Canada. The Canadian economy showed a modest growth of 0.2% in December, matching the pace of contraction in November. This data, coupled with the US Personal Consumption Expenditure (PCE) Price Index for January, led to a slight decrease in the USD/CAD pair, which fell to approximately 1.4430 during North American trading hours on Friday.
The Canadian economy's expansion in December was below economists' expectations of a 0.3% growth rate. Market participants had anticipated the economy to grow at a slower annualized pace of 1.9%, but the actual growth rate was 2.6% compared to the same quarter in 2023. This rate was also faster than the 2.2% growth observed in the third quarter of the previous year, highlighting mixed signals from the Canadian GDP data for the fourth quarter of 2024.
On the US front, the core PCE inflation, excluding volatile food and energy prices, decelerated to 2.6% annually from December's 2.8%, aligning with market expectations. Despite this annual slowdown, the underlying inflation increased monthly by 0.3%, a notch higher than the previous reading of 0.2%. This deceleration in US inflation might prompt the Federal Reserve to adopt a less restrictive interest rate policy in the near future.
The outlook for the Canadian Dollar remains weak, exacerbated by external factors including US President Donald Trump's announcement of imposing 25% tariffs on Canada and Mexico. These tariffs are likely to add pressure on the Canadian economy and its currency in the coming months.
The mixed economic signals from Canada highlight a fragile recovery path for its economy. While the annualized growth rate outperformed market expectations, it was not enough to strengthen the CAD significantly against its US counterpart. The GDP data suggests Canada is still grappling with economic uncertainties, reflected in its fluctuating monthly performance.
Meanwhile, the US's slower inflation growth could potentially ease some of the pressure on interest rates, offering a glimmer of hope for markets concerned about tighter monetary policies. However, this scenario also underscores potential challenges for Canadian exports, as a strong USD could further strain trade balances under the looming threat of tariffs.