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Canadian dollar weakens as Fed rate signal offsets GDP gain

The Canadian dollar CADUSD weakened against its U.S. counterpart on Wednesday, pulling back from a near three-week high, as the Federal Reserve’s signal that an interest rate cut was not imminent overshadowed stronger-than expected domestic data.

Canadian gross domestic product likely expanded by 0.3% in December, which would mean annualized growth of 1.2% in the fourth quarter, a preliminary estimate showed. The Bank of Canada has projected a flat reading.

“The Canadian news was buried under 10 other headlines,” said Adam Button, chief currency analyst at ForexLive.

The loonie would likely have ended higher were it not for the Fed as well as the decline in stocks and oil prices, Button said.

U.S. stocks fell as the Federal Reserve held rates steady, with Chair Jerome Powell pushing back strongly on the idea that the central bank could cut rates as soon as March, as many market participants have been expecting.

The price of oil, one of Canada’s major exports, settled down 2.5% at $75.85 a barrel, giving back some recent gains, while the Canadian dollar was trading 0.3% lower at 1.3440 to the greenback, or 74.40 U.S. cents.

After the GDP data, it touched its strongest intraday level since Jan. 12 at 1.3359.

Canadian government bond yields eased across the curve. The 2-year was down 3.2 basis points at 4.012%, while the gap between it and the U.S. equivalent narrowed by 6.7 basis points to 24.8 basis points, its narrowest since Oct. 16.

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