The Canadian dollar made strong gains after Bank of Canada officials’ hawkish comments suggested a rate rise was nearer. Sterling was higher on forecast-beating UK inflation data. The dollar index was lower as the FOMC begins a two-day policy meeting.
The main data out of the European session was the UK CPI report which helped the pound recover some losses made following Thursday’s post-UK elections tumble. However, sterling’s gains may be limited due to political risks as Prime Minister Theresa May fights to secure her government as she aims strike a deal with the DUP to pass her legislative program. A deal has not been reached yet after a meeting with the DUP leader today.
Cable rose to a high of $1.2736, steadily rising throughout the session from the $1.2650 area after UK inflation jumped to its highest in nearly four years in May. The annual inflation rate rose 2.9% in May to beat both forecasts and April’s rate of 2.7%. On a monthly basis, inflation rose 0.3% in May, beating expectations of a 0.2% rise but coming below April’s 0.5%. Core prices rose 2.6% in the year versus 2.4% forecast, the fastest pace since late 2012.
Out of the Eurozone, the German ZEW investor confidence survey rose to 88 this month, above May’s 83.9 and forecasts for a rise to 85. The data had little impact on the euro, which traded steadily against the dollar just above the key $1.1200 level to as high as $1.1224.
In the US, core PPI, the key gauge of underlying producer price pressures that excludes food, energy and trade services, rose 2.1% year-on-year, while headline PPI rose 2.4% over the past 12 months versus 2.3% expected, which would help endorse a Fed rate hike. The dollar rose versus the yen after the data to a session high of 110.21 yen. There is caution as the FOMC meeting gets underway today with a policy announcement due on Wednesday. Most economists expect the Fed to raise its benchmark rate by 25 basis points to a target range of 1.00 to 1.25% at this meeting. Fed Chair Janet Yellen is due to hold a press conference soon after the announcement. Since the Fed rate hike is widely expected already, what would be more important to investors would be to see whether there will be any details about the Fed’s plans on winding down its huge balance sheet.
The Canadian dollar was one of the best performing major currencies today and touched a two-month high against the greenback. The trigger was a shift in rhetoric from the Bank of Canada after two officials made some hawkish comments that suggested the central bank was starting to make the case for a modest tightening in monetary policy later this year, much sooner than many people had thought. The BOC had until now a "lower for longer" standpoint on rates. But comments on Monday by Senior Deputy Governor Carolyn Wilkins led to a repricing of the BOC rate hike path after she stated that they were assessing whether the current monetary policy stimulus will be required going forward. She noted how the Canadian economy had improved significantly, especially first quarter growth data. BOC Governor Steven Poloz, in an interview with CBC Radio today, basically echoed Wilkins’ comments and signaled that rates won’t be on hold forever, mentioning that the rate cuts put in place in 2015 have largely done their work.
The USD/CAD pair dropped to $1.3223, the lowest level since April 13. The loonie’s direction could also be impacted by crude oil inventory data due later today from the American Petroleum Institute. A drawdown would be supportive for the Canadian dollar, which is sensitive to oil prices. WTI oil last traded down to $45.54 a barrel.
Gold prices fell for a fifth consecutive day to touch $1259.16 an ounce, as the precious metal was being weighed down by the prospects of a Fed rate hike.
