The Canadian dollar is in negative territory on Tuesday. Currently, USD/CAD is trading at 1.2524, up 0.57%.
US inflation lifts greenback
The Federal Reserve has long maintained that higher inflation levels are transitory, but this message is sure to ring somewhat hollow after inflation surged in June. Core CPI climbed 0.9% MoM, well above the estimate of 0.4% and ahead of the May read of 0.7%. On an annualized basis, Core CPI jumped 4.5%, above the consensus of 4.0% and up from the May reading of 3.8%. This marked the highest rate of core inflation since 1991.
The strong numbers have lifted the US dollar, as speculation grows that the Federal Reserve may be forced to tighten policy sooner and more aggressively than expected in order to curb inflation from getting out of control. US Treasury yields have been falling sharply, reflecting fears that the Fed might overshoot its inflation target of 2%.
The Bank of Canada holds its policy meeting on Wednesday (14:00 GMT). The BoC was the first major central bank to scale back bond purchases and is expected to taper for a third time on Wednesday, reducing weekly purchases from CAD 3 billion dollars to 2 billion dollars. Last week’s employment report which showed a gain of 230 thousand new jobs in June makes a taper even more likely.
What lies down the road for the BoC? An ING report said that it expects the central bank to shut down the QE program by the end of this year, with rate hikes to follow in the second half of 2022. The report added that inflation is higher than the BoC target and the economy is on an “encouraging growth path”. The economy may be headed in the right direction, but a resurgence of Covid in Canada could be the spoke in the wheels of the BoC’s monetary exit strategy.
- USD/CAD faces resistance at 1.2594. Above, there is resistance at 1.2735
- On the downside, there is support at 1.2307. Below, there is support at 1.2161