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GDP gains double down on US policy changes

USD - United States Dollar

Real gross domestic product (GDP) grew 6.5% in June, following a 4.8% increase in May. The positive news from Statistics Canada may only add to yesterday’s policy statement by the US Federal Reserve.

May and June's gains offset some of the March and April declines, economic activity was about 9% below February's pre-pandemic level. Both goods-producing (+7.5%) and services-producing (+6.1%) industries were up as 19 of 20 industrial sectors posted increases in June.

Yesterday, the US Federal Reserve amended its inflation management system, effectively keeping interest rates lower for longer. Having moved away from a fixed inflation target, the new policy provides the Fed greater scope to absorb periods of higher inflation, offsetting increases in prices against periods of lower inflation.

Despite the short term support the policy provided, we expect the policy change will act as a drag on the US dollar. If the Fed can absorb price pressures and leave rates on hold near zero for longer, a greater disparity in yields will emerge as other central banks begin to show signs of tightening policy.

USDCAD nearly broke 1.30 this morning and has reached a 6-month low.

Key Movers

Great British pound sits higher against both the euro and US dollar. GBPUSD rallied to 1.3260 yesterday after the US federal reserve announcement. GBPUSD movement took on a see-saw effect on the news with the US dollar weakening initially, taking the currency pair to 1.3260, but then strengthening back to 1.3172 as US treasury yields rose to several-month highs. Overnight the Asian markets have had the chance to digest the new plan, which has seen GBPUSD advance again touching 1.3280 in the past hours. GBPEUR gains seem to be related to the latest coronavirus headlines in Europe. A second wave now seems very likely with the World Health Organization alerting Europe to managing a tricky transition from summer to fall. GBPEUR had made an unsuccessful break for 1.1200 yesterday evening and isn't far off now.

The Australian dollar drifted sideways throughout domestic trade on Thursday before bouncing through resistance and testing a break above 0.73 overnight. Following the Fed announcement, the Australian dollar immediately jumped through resistance at 0.7260 to touch intraday highs at 0.7291, before drifting lower into this morning’s open. Having broken resistance, the door is now open for the Australian dollar to extend gains and push toward 0.75 US cents leading into the end of the year.

Expected Ranges

EUR/CAD: 1.549 - 1.560 ▼

GBP/CAD: 1.731 - 1.749 ▼

AUD/CAD: 0.951 - 0.963 ▼

USD/CAD: 1.305 - 1.314 ▲