USD/CAD surpasses 1.3700 level after US labor cost data and weak Canadian GDP

• USD/CAD rises above 1.0700 on multiple tailwinds.
• The US dollar rebounds after the high figures of the first quarter labor cost index.
• Weaker than expected Canadian GDP weighs on the Canadian dollar.

The USD/CAD pair rises above the crucial resistance of 1.3700 in the American session on Tuesday. USD/CAD strengthens while the US Dollar extends its recovery after the US Bureau of Labor Statistics (BLS) released stronger-than-expected Q1 Labor Cost Index data.

The agency reported that the labor cost index rose sharply by 1.2% versus the consensus of 1.0% and the previous reading of 0.9%. The US Dollar Index (DXY) rebounds and approaches 106.00. The higher labor cost index is generally driven by strong wage growth, which ultimately translates into increased household spending, suggesting persistent inflation prospects.

This is expected to allow the Federal Reserve (Fed) to rule out rate cuts and maintain the restrictive interest rate framework for longer. For a more concrete outlook for interest rates, investors will focus on the Fed's monetary policy announcement on Wednesday. The Fed is expected to keep interest rates in the 5.25%-5.50% range. Regarding the direction of interest rates, the Fed reiterates the need to keep them rising for a long time until it gains confidence that inflation will sustainably return to the desired rate of 2%.

Apart from the rebound of the US dollar, the weakness of the Canadian dollar has also put pressure on the active Canadian dollar. Canada's monthly Gross Domestic Product (GDP) grew at a slower pace of 0.2%, versus estimates of 0.3% and the previous reading of 0.5%, revised down from 0.6%. This indicates the consequences of the Bank of Canada (BoC) raising interest rates. The BoC may start cutting interest rates sooner than expected due to weak growth and steadily easing price pressure. Traders have valued the June meeting as the date from which the BoC could start cutting interest rates.