1.4230: Fed tightening bets lift Greenback, pushing Canadian Dollar to four-week lows

• Nearly 2% has been added to USD/CAD in less than one week. The pair has reached a fresh four-week high of 1.4230 so far.
• Above-forecast US inflation, alongside a resilient labour market, has reinforced expectations for a rate increase of at least a quarter-point at the next Fed meeting. 
• The contrast in employment figures from the US and Canada published on Friday is likely to support the pair above 1.4000, according to TD Securities' analysts.

1.4230 marks a fresh four-week high for USD/CAD. At the start of the US session, the pair is trading at that level after gaining nearly 2% in less than a week. The Canadian Dollar (CAD) has returned to its downward trend as the US Dollar (USD) advances broadly on Wednesday. Investors are increasingly anticipating Federal Reserve (Fed) tightening in December.

October consumer inflation exceeded forecasts, according to the US Bureau of Labour Statistics (BLS), prompting speculative investors to lift the Greenback. Together with Friday's strong Nonfarm Payrolls (NFP) report, the figures have strengthened expectations for a Fed rate increase of at least a quarter-point at the December meeting.

At least a quarter-point: Fed officials reinforce December hike expectations

Late Tuesday, comments from Fed officials reinforced those expectations. Philadelphia Fed President Anna Paulson signalled “further gradual tightening” ahead to return inflation to target. Dallas Fed President Lorie Logan took a similar position, stating that “the Fed needs at least two more quarter-percentage-point  increases.”

Ahead of the US Consumer Price Index (CPI) release, Fed Governor Christopher Waller said an inflation reading of 0.3% or higher would lead him to support a 25-basis-point increase. The eventual reading showed a 0.4% rise. He also added that “I believe a 50-basis-point hike in the policy rate should be considered”. According to the CME’s FedWatch Tool, futures markets now assign a 12% probability to a jumbo December rate increase, up from virtually none last week.

Canada presents a contrasting picture. Released alongside the US NFP figures, October's employment report recorded a net decline in jobs and an increase in unemployment. In the assessment of TD Securities analysts, “diverging employment data releases will likely keep USDCAD supported above 1.40,” because a “rising unemployment rate amid falling wage growth rate in Canada also reduces the market pricing of a December BoC rate hike relative to the Fed.” They expect weaker Canadian labour conditions, combined with a relatively more hawkish Fed, to maintain pressure on the Canadian Dollar for now.