Canadian Dollar weakens as Fed's cautious tone boosts US Dollar demand

• The Canadian Dollar weakens as the Fed's cautious tone boosts the US Dollar.
• Canada's GDP shrinks 0.3% MoM in August, missing expectations for flat growth.
• The US Dollar Index (DXY) extends its winning streak for the third day, trading near three-month highs around 99.75.

The Canadian Dollar (CAD) remains under pressure against the US Dollar (USD) on Friday, weighed down by renewed demand for the Greenback after the Federal Reserve's (Fed) cautious guidance tempered expectations of another rate cut this year.

At the time of writing, USD/CAD is trading around 1.4009, near a one-week high after briefly dipping to a one-month low on Wednesday in the aftermath of the Bank of Canada's (BoC) hawkish rate cut. The central bank lowered its benchmark rate by 25 basis points (bps) to 2.25% but signaled that the move could mark the end of its easing cycle.

The Loonie came under additional pressure after Statistics Canada reported that Gross Domestic Product (GDP) contracted 0.3% MoM in August, missing expectations for a flat reading. Meanwhile, July's growth was revised down to 0.2% from 0.3%.

In the United States (US), the Fed delivered a second consecutive 25-basis-point (bps) "risk-management" rate cut on Wednesday, in line with market expectations. However, the move was largely priced in, with investors instead focusing on Chair Jerome Powell's post-meeting remarks. Powell poured cold water on the prospect of a December rate cut, saying a further move was "not a foregone conclusion."

In response, traders quickly trimmed bets on further easing. Data from the CME FedWatch Tool show the probability of a quarter-point rate cut in December has fallen to around 66.8%, down sharply from about 91.7% a week ago.

Earlier in the day, comments from Fed officials reinforced the cautious tone. Kansas City Fed President Jeffrey Schmid, who voted to keep rates unchanged this week, said the current policy stance is "only modestly restrictive" and warned that rate cuts cannot address structural changes in the labor market. Schmid noted that while the job market is "largely in balance," inflation remains too high.

Meanwhile, Dallas Fed President Lorie Logan echoed a similar sentiment, saying she "would've preferred to hold rates steady this week" and that she would find it "difficult to cut rates again in December," adding that the Fed already mitigated employment risks with its September reduction.

The US Dollar Index (DXY), which tracks the Greenback's value against a basket of six major currencies, is extending its advance for the third straight day, hovering near three-month highs around 99.74.