Canadian Dollar recovers as Oil prices rebound, US Dollar eases after PCE data

• The Canadian Dollar strengthens as a rebound in Oil prices supports the commodity-linked currency.
• WTI Oil rises to $70.50, helping USD/CAD correct from its recent 14-month highs.
• The US Dollar softens after US PCE inflation data largely match market expectations.

USD/CAD trades around 1.4205 on Thursday at the time of writing, down 0.21% on the day after recently reaching its highest level in 14 months. The pair is correcting lower as the Canadian Dollar (CAD) benefits from a modest recovery in Oil prices, while the US Dollar (USD) gives back part of its recent gains following the latest US inflation data.

The rebound in Crude Oil is providing some relief for the Canadian Dollar. West Texas Intermediate (WTI) Oil is up 1.05% on the day, trading around $70.50 per barrel at the time of press. As Canada's main export, stronger Oil prices tend to support the Loonie by improving the country's export outlook, contributing to the pullback in USD/CAD after its recent rally.

Meanwhile, the US Dollar is edging lower after the release of the Personal Consumption Expenditures (PCE) Price Index, the Federal Reserve's (Fed) preferred measure of inflation. Headline PCE inflation accelerated to 4.1% YoY in May, in line with market expectations, while the core PCE Price Index increased by 3.4% YoY, also matching forecasts. Personal Income and Personal Spending both rose 0.7% MoM, highlighting the continued resilience of the US economy.

Additional US data released on Thursday painted a mixed picture. Initial Jobless Claims declined to 215K, beating expectations of 225K and pointing to a still resilient labor market. Meanwhile, Durable Goods Orders fell 4.5% in May, matching forecasts after April's strong increase.

The US Dollar Index (DXY), which measures the Greenback against a basket of six major currencies, is down 0.12% on the day around 101.45, reflecting the modest easing in the US Dollar following the inflation release.

Although the US Dollar has weakened modestly following the inflation report, expectations that the Fed could keep a restrictive policy stance continue to provide underlying support for the Greenback. Markets remain attentive to upcoming economic releases for further clues on the outlook for US monetary policy.

Commerzbank nevertheless believes the recent surge in USD/CAD may have gone too far. Analyst Michael Pfister argues that both the market's expectations for additional Fed tightening and the previous decline in Oil prices have likely been overstated. According to the bank, substantially more negative Canada-specific developments would be needed for USD/CAD to extend its advance significantly beyond recent highs.