Canadian Dollar Gains as US PCE Inflation Data Eases Rate Hike Expectations

[p]During early European trading hours on Friday, the USD/CAD pair fell to roughly 1.4190. The U.S. dollar weakened against the Canadian dollar as recent Personal Consumption Expenditures (PCE) inflation data softened expectations for further U.S. rate hikes. Analysts will also monitor the Michigan Consumer Sentiment Index later that day.[/p][p]May’s headline PCE rose 4.1% year‑over‑year, the first reading above 4.0% since April 2023, yet it aligned with forecasts according to the U.S. Bureau of Economic Analysis (BEA). On a month‑on‑month basis, PCE increased by 0.4%, slightly below the 0.5% consensus.[/p][p]Analysts suggest that oil prices, which fell back to pre‑war levels following a preliminary U.S.–Iran peace agreement, indicate that inflation may have peaked last month or is nearing its apex.[/p][p]Market expectations now assign roughly a 28.9% likelihood that the Federal Reserve will raise rates at its July meeting, down from 34.2% in the previous session, per the CME FedWatch.[/p][p]The Bank of Canada is projected to keep rates unchanged for the rest of the year. BoC minutes revealed little shift toward narrowing the spread between U.S. and Canadian rates, potentially limiting upside momentum for the Loonie.[/p][p]Meeting minutes indicated the BoC’s council is maintaining a flexible stance to react to potential U.S. trade restrictions, fluctuating energy prices, or a combination of both. Traders now anticipate roughly 17 basis points of tightening from Canada’s central bank by December, down from about 60 bps forecasted a month ago, Reuters reports.[/p]

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