USD/CAD rises above 1.3700 as strong US Q1 Employment Cost Index, weak Canadian GDP

• USD/CAD moves higher above 1.0700 on multiple tailwinds.
• The US Dollar rebounds after upbeat Q1 Employment Cost Index data.
• Weaker-than-expected Canadian GDP weighs on the Canadian Dollar.

The USD/CAD pair rises above the crucial resistance of 1.3700 in Tuesday’s early American session. The Loonie asset strengthens as the US Dollar extends recovery after the United States Bureau of Labor Statistics (BLS) reported stronger-than-expected Q1 Employment Cost Index data.

The agency reported that the Labor Cost Index rose sharply by 1.2% from the consensus of 1.0% and the prior reading of 0.9%. The US Dollar Index (DXY) rebounds to near 106.00. The Highest Labor Cost index is broadly driven by strong wage growth, which eventually leads to an increase in households’ spending, suggesting a stubborn inflation outlook.

This is expected to allow the Federal Reserve (Fed) to keep rate cuts off the table and maintain the restrictive interest rate framework for a longer period. For more concrete interest rate outlook, investors will focus on the Fed’s monetary policy announcement on Wednesday. The Fed is expected to keep interest rates steady in the range of 5.25%-5.50%. For the interest rate guidance, the Fed reiterates the need to keep interest rates higher for a long time until it gains confidence that inflation will sustainably return to the desired rate of 2%.

Apart from a rebound in the US Dollar, the weak Canadian Dollar has also exerted pressure on the Loonie asset. The monthly Canadian Gross Domestic Product (GDP) grew at a slower pace of 0.2% from the estimates of 0.3% and the prior reading of 0.5%, downwardly revised from 0.6%. This indicates the consequences of higher interest rates by the Bank of Canada (BoC). The BoC may start reducing interest rates sooner due to weak growth and consistently softening price pressures. Traders have priced in the June meeting from when the BoC could pivot to interest rate cuts.