Canada's economy expanded by 0.3% month-over-month in May, following an upwardly revised 0.6% increase in April, according to Statistics Canada. Growth was broad-based, with both goods-producing and services-producing industries contributing, and 13 out of 20 industrial sectors posting gains. Goods-producing industries expanded by 0.6%, while services-producing industries rose by 0.2%, driven largely by real estate, rental and leasing, and public administration sectors [1][2].
The release of the GDP data initially boosted the Canadian Dollar (CAD), with USD/CAD breaching below 1.4000 and hitting a two-week low at 1.3991 on Thursday. However, this bullish momentum proved short-lived as the US Dollar (USD) regained strength. By Friday, USD/CAD was trading around 1.4045, recovering from its earlier lows [1][2].
Market sentiment shifted as investors continued to price in the risk that the Federal Reserve may keep monetary policy restrictive for longer. Rising energy price volatility and ongoing geopolitical tensions in the Middle East have fueled inflation concerns, supporting expectations that the Fed could deliver a 25-basis-point interest rate hike in September. Fed Chair Kevin Warsh reiterated the central bank's commitment to restoring price stability after leaving interest rates unchanged at 3.5%-3.75%, while three policymakers voted in favor of an immediate rate increase. The CME FedWatch tool currently assigns around a 65% chance to a 25-basis-point Fed rate hike at the September meeting [1].
The CAD was the strongest against the Swiss Franc, showing a 0.49% gain, but lost 0.20% against the USD on the day. Investors are now awaiting the final University of Michigan Consumer Sentiment survey and inflation expectations for further clues on US monetary policy [1].
CONCLUSION
Canada's GDP growth in May provided a brief boost to the Canadian Dollar, but the currency quickly lost ground as US Dollar strength returned amid expectations of further Fed rate hikes. The market remains focused on US monetary policy and upcoming economic data, with the CAD's gains proving temporary against the backdrop of global inflation concerns and Fed hawkishness.