Canada's GDP weaker than expected, Canadian dollar shrugs

The Canadian dollar is coming off its first winning week since July. USD/CAD is calm on Monday, trading at 1.3739, down 0.04% on the day.

Canada's GDP for June was a disappointment, declining 0.1% m/m in June. This was unchanged from May and missed the market estimate of 0.1%. The decline was driven by decreased activity in manufacturing, as US tariffs made themselves felt in the Canadian economy.

Quarterly, GDP fell by 1.6% in Q2, after a downwardly revised gain of 2% in Q1. This missed the market estimate of -0.6%. Notably, this was the first quarterly contraction in seven quarters, as US tariffs took a toll on Canadian exports.

The weak GDP release has raised expectations of a Bank of Canada rate cut at the September 17 meeting. The money markets have raised the likelihood of a quarter-point cut to 48%, up from 40% just prior to the GDP report. The BoC has maintained rates at 2.75% at three consecutive meetings and the employment and inflation data for August will be critical in determining whether the central bank holds or cuts rates.

US PCE core inflation hits five-month high

The US core personal consumption expenditures price index (core PCE), the Federal Reserve's preferred inflation indicator, crept higher to 2.9% in July, up from 2.8% in June. This was the highest level since February and matched the market estimate. Monthly, core PCE rose 0.3%, unchanged from June and in line with the market estimate.

Market expectations for a rate cut in September rose slightly after the core CPE report, from 86% to 89% according to CME's FedWatch.

• USD/CAD is testing resistance at 1.3742. Above, there is resistance at 1.3751 and 1.3761
• Below, there is support at 1.3732 and 1.3723