Key Takeaways
- The Canadian dollar weakened to C$1.3822 per U.S. dollar on September 10, according to Bank of Canada data.
- U.S. consumer prices increased 0.4% in August, while annual inflation remained at 3.4%.
- The Federal Reserve is scheduled to meet on September 15-16, putting U.S. inflation and interest-rate expectations in focus.
U.S. Inflation Gives the Fed a Fresh Policy Test
The latest U.S. Consumer Price Index data showed that consumer prices increased 0.4% in August on a seasonally adjusted basis.
Over the 12 months through August, the CPI increased 3.4%, unchanged from July. Core inflation, which excludes food and energy, rose 0.3% during the month and 2.4% over the year.
Energy prices were an important part of the August increase. The energy index rose 2.1% during the month, while gasoline prices increased 3.9%.
The figures give investors another important piece of information to consider as they assess the Federal Reserve's next policy move.
Why the Canadian Dollar Is Sensitive to Fed Policy
Currency markets closely watch the difference between Canadian and U.S. interest rates.
When investors expect U.S. interest rates to remain higher, the U.S. dollar can become more attractive relative to other currencies. That can put pressure on currencies such as the Canadian dollar.
The latest movement does not mean the Federal Reserve has decided to raise rates. Instead, it reflects changing expectations in financial markets ahead of the central bank's upcoming meeting.
Federal Reserve Meeting Comes Into Focus
The Federal Reserve's next Federal Open Market Committee meeting is scheduled for September 15-16.
The meeting will be closely watched because policymakers will have the latest inflation and economic data available when they assess monetary policy.
The Fed's previous July meeting ended with the target range for the federal funds rate unchanged. The minutes showed that several officials had argued for a rate increase, while the majority supported keeping rates unchanged.
That makes the September meeting particularly important for financial markets.
Bank of Canada Is Also Watching the Economic Picture
The Bank of Canada has kept its policy rate at 2.25%. Its latest rate decision on September 2 left the target for the overnight rate unchanged.
For the Canadian dollar, the outlook depends not only on U.S. monetary policy but also on Canada's own economic conditions, interest-rate expectations and global financial markets.
A wider gap between U.S. and Canadian interest rates could create additional pressure on the Canadian dollar if markets increasingly expect tighter U.S. monetary policy.
What Could Happen to the Canadian Dollar Next?
The Canadian dollar's near-term direction will likely depend heavily on incoming economic data and central-bank signals.
The September Federal Reserve meeting is the immediate event to watch. Any change in the Fed's assessment of inflation, economic growth or interest rates could influence the U.S. dollar and, in turn, the Canadian dollar.
For Canadians and Canadian businesses involved in cross-border trade, currency movements can affect the cost of U.S. goods, imports, travel and other transactions priced in U.S. dollars.
TwikUp Insight
The latest currency move is less about a confirmed Federal Reserve rate hike and more about expectations surrounding U.S. monetary policy.
With U.S. inflation still above the Federal Reserve's 2% longer-run goal and the September meeting approaching, the Canadian dollar could remain sensitive to every major U.S. economic release and Fed signal.