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The Bank of Canada (BoC) raised the overnight rate to 4.5%, while stating that it will continue with Quantitative Tightening (QT).

On rising prices, it stated that "inflation is projected to come down significantly this year. Lower energy prices, improvements in global supply conditions, and the effects of higher interest rates on demand are expected to bring CPI inflation down to around 3% in the middle of this year and back to the 2% target in 2024."

On economic growth, the Bank stated that "recent economic growth has been stronger than expected and the economy remains in excess demand. Labour markets are still tight…However, there is growing evidence that restrictive monetary policy is slowing activity, especially household spending."

On the future path of policy, the Bank noted that "if economic developments evolve broadly in line with the MPR outlook, Governing Council expects to hold the policy rate at its current level while it assesses the impact of the cumulative interest rate increases."

Key Implications

The BoC's first meeting of 2023 looks to be the last in which it will raise its policy rate. Heading into today, the Bank had communicated that it could go either way with today's decision - deciding between a final hike or a pause. Given the robustness of consumer spending and employment trends, the BoC clearly felt it needed this final hike to solidify the turn in economic momentum.

Looking at the Bank's forecast, the economy is set for a consumer led slowdown, with GDP likely to "stall through the middle of 2023." Greater conviction in this has also led the BoC to cut its inflation forecast. With the belief that the economy is on the path to price stability, the BoC can now step to the sidelines and let its restrictive policy filter through the economy. Though it does have the option to hike again should inflation prove uncooperative, we are expecting it to hold rates at this level for most of 2023, before cutting at the end of the year to drive a better balance between interest rates being too far in restrictive territory and a weakening economy.

BoC raises overnight rate by 25bps to 4.50% as widely expected. The Bank Rate and deposit rate are also lifted to 4.75% and 4.50% respectively.

In the statement, BoC said, "If economic developments evolve broadly in line with the MPR outlook, Governing Council expects to hold the policy rate at its current level while it assesses the impact of the cumulative interest rate increases."

That is, a pause is going to follow. But, BoC is still "prepared to increase the policy rate further if needed to return inflation to the 2% target."

BoC also noted, that recent economic growth has been "stronger than expected" with the economy remains in "excess demand" Labor markets are "still tight". But there is "growing evidence that restrictive monetary is slowing activity". It expects the effects of tightening to "continue to work through the economy" while weaker foreign demand will weigh on exports.

BoC projects growth of about 1% in 2023 and 2% in 2024. Inflation is projected to fall to around 3% in the middle of 2023, and then 2% in 2024.

Full statement here.

The Bank of Canada today increased its target for the overnight rate to 4½%, with the Bank Rate at 4¾% and the deposit rate at 4½%. The Bank is also continuing its policy of quantitative tightening.

Global inflation remains high and broad-based. Inflation is coming down in many countries, largely reflecting lower energy prices as well as improvements in global supply chains. In the United States and Europe, economies are slowing but proving more resilient than was expected at the time of the Bank's October Monetary Policy Report (MPR). China's abrupt lifting of COVID-19 restrictions has prompted an upward revision to the growth forecast for China and poses an upside risk to commodity prices. Russia's war on Ukraine remains a significant source of uncertainty. Financial conditions remain restrictive but have eased since October, and the Canadian dollar has been relatively stable against the US dollar.

The Bank estimates the global economy grew by about 3½% in 2022, and will slow to about 2% in 2023 and 2½% in 2024. This projection is slightly higher than October's.

In Canada, recent economic growth has been stronger than expected and the economy remains in excess demand. Labour markets are still tight: the unemployment rate is near historic lows and businesses are reporting ongoing difficulty finding workers. However, there is growing evidence that restrictive monetary policy is slowing activity, especially household spending. Consumption growth has moderated from the first half of 2022 and housing market activity has declined substantially. As the effects of interest rate increases continue to work through the economy, spending on consumer services and business investment are expected to slow. Meanwhile, weaker foreign demand will likely weigh on exports. This overall slowdown in activity will allow supply to catch up with demand.

The Bank estimates Canada's economy grew by 3.6% in 2022, slightly stronger than was projected in October. Growth is expected to stall through the middle of 2023, picking up later in the year. The Bank expects GDP growth of about 1% in 2023 and about 2% in 2024, little changed from the October outlook.

Inflation has declined from 8.1% in June to 6.3% in December, reflecting lower gasoline prices and, more recently, moderating prices for durable goods. Despite this progress, Canadians are still feeling the hardship of high inflation in their essential household expenses, with persistent price increases for food and shelter. Short-term inflation expectations remain elevated. Year-over-year measures of core inflation are still around 5%, but 3-month measures of core inflation have come down, suggesting that core inflation has peaked.

Inflation is projected to come down significantly this year. Lower energy prices, improvements in global supply conditions, and the effects of higher interest rates on demand are expected to bring CPI inflation down to around 3% in the middle of this year and back to the 2% target in 2024.

With persistent excess demand putting continued upward pressure on many prices, Governing Council decided to increase the policy interest rate by a further 25 basis points. The Bank's ongoing program of quantitative tightening is complementing the restrictive stance of the policy rate. If economic developments evolve broadly in line with the MPR outlook, Governing Council expects to hold the policy rate at its current level while it assesses the impact of the cumulative interest rate increases. Governing Council is prepared to increase the policy rate further if needed to return inflation to the 2% target, and remains resolute in its commitment to restoring price stability for Canadians.

Information note

The next scheduled date for announcing the overnight rate target is March 8, 2023. The Bank will publish its next full outlook for the economy and inflation, including risks to the projection, in the MPR on April 12, 2023.

Today, at 5:00 pm (GMT +2), the Bank of Canada will publish the Overnight Rate, which represents short-term interest rates, and is pivotal to the overall pricing of the Canadian Dollar in the global markets. Let's look at how the markets are faring ahead of the BoC rates release.

USDCAD

USDCAD is currently trading around a Daily drop-base-rally demand zone above the 200-EMA (Exponential Moving Average). The moving averages suggest that we are currently bullish on price action. Moreover, coupled with the trendline support, bullish break of structure (marked by the short arrowed line), and the demand zone region, we can expect a bullish reaction from the marked rectangular area.

GBPCAD

GBPCAD has recently broken structure bullish, as shown by the arrowed line to the left. There is also trendline support overlapping with the 50-SMA right around 61.8% of the Fibonacci retracement level. Thus, the price would deliver a bullish reaction from the marked demand zone.

EURCAD

EURCAD has been trading around a Pivot zone on the Daily timeframe. Considering the bullish lay of the Moving Averages, we may not see the bearish move extend below 1.44640. The interest rates will bring clarity to the direction in the future.

AUDCAD

The daily timeframe of AUDCAD shows the price currently within a supply zone. It seems logical to expect some bearish relief from the last bullish run. My target for the bearish retracement would be 0.93810.

Analysts’ Expectations:

• Previous: 4.25%
• Forecast: 4.50%

CONCLUSION

The trading of CFDs comes at a risk. Thus, to succeed, you have to manage risks properly. To avoid costly mistakes while you look to trade these opportunities, be sure to do your due diligence and manage your risk appropriately.

ECB Governing Council member Gabriel Makhlouf said, "We need to continue to increase rates at our meeting next week – by taking a similar step to our December decisions – and also at our March meeting, although our future policy decisions need to continue to be data-dependent given the prevailing uncertainty."

"Raising the policy rate also signals our commitment to price stability," Makhlouf added. "It sends a clear message that we will not allow inflation to stay above 2 per cent and helps to contain inflation expectations, guarding against the emergence of self-reinforcing inflation dynamics and tackling the risk of a persistent increase in inflation expectations."

Separately, Bundesbank President Joachim Nagel said, "For February and March, we have announced that we will raise interest rates sharply again. Then we will look at where the inflation rate is in the spring and what our experts' forecast looks like. I wouldn't be surprised if we have to keep raising rates even after the two announced steps."

Inflation data continues to be the main driver of the markets. This morning the currency market focused on a surprise out of Australia, where the annual CPI growth rate for the fourth quarter accelerated from 7.3% to 7.8%, against expectations of only 7.5%. Inflation hit its highest level since 1990. Moreover, a 1.9% rise in prices in the final three months of last year shows that inflationary pressures have stayed the same.

The significant outperformance of the data compared to expectations triggered a wave of Aussie buying. AUDUSD climbed to 0.7120 by the start of the European session as traders reassessed the outlook for policy tightening, suggesting a higher interest rate.

From a broader perspective, the Australian data and today’s stronger-than-expected numbers from New Zealand and earlier from Japan should remind the market that inflation is sticky and there is a long fight ahead. This is true now that employment levels in the developed world have been near their highest for decades. If high inflation is a global phenomenon, it has the potential to regain some of the traction the dollar has lost since October.

Equity markets are back in the red on Wednesday, as investors appear to prepare themselves for a disappointing earnings season for big tech.

The last few weeks may turn out to perfectly encapsulate how the year will be as a whole, fluctuating significantly and suddenly between optimism and pessimism as the data and headlines dictate.

We appear to have entered the latter phase now after starting the year in a very buoyant mood, with earnings painting a more realistic picture of the outlook for this year than investors appeared to be convincing themselves was the case. Layoffs, missed headline numbers and downbeat forecasts are quickly becoming the norm.

Results coming from big finance were not great and have probably set the tone for the season. Big tech is up next and if Microsoft is anything to go by, we're in for another bumpy ride. The cloud business has been a hugely important growth area of the business and the prospect of this slowing at a time when the company has announced plans to lay off 10,000 staff is a concern. And the share price is feeling the burn pre-market after initially jumping on better earnings.

Concerning inflation data

Inflation data from Australia and New Zealand overnight won't fill investors with optimism either. While every country has its own challenges, New Zealand in particular, they also have a lot in common and stubborn inflation will cast doubt on expectations for it to fall more aggressively this year allowing for lower terminal rates and even rate cuts.

Especially coming at a time when economies are displaying a little more resilience - the US could achieve a soft landing, the eurozone could avoid recession, the UK may not be in recession already, etc - meaning central banks may feel less pressured to ease up. It isn't ideal.

Case for a rebound?

Oil prices are marginally higher after paring gains on Tuesday. It's been on a good run lately, buoyed by the prospect of a softer landing, globally, and a stronger rebound in China. There is some technical resistance around $88-89 in Brent which, combined with weakening economic sentiment, may have triggered some profit-taking. Marginal gains so far don't fill me with confidence that a deeper correction isn't possible if sentiment continues to be hit by weaker earnings.

Preparing for correction?

The gold rally appears to have stalled, with any gains coming on softer momentum and the last eight days being equally split between winning and losing days. Coming after such a strong rebound and as data becomes slightly less favourable, it's no surprise to see the trend weakening. If we do see a correction, the first test will come around $1,900 followed by $1,880.

Holding on

Bitcoin is continuing to trade in a roughly $1,000 range between $22,300 and $23,300 and is down a little over 1% so far on the day. Under the circumstances, we're seeing decent resilience with sentiment elsewhere turning more negative. Considering the gains that preceded it as well, the longer it can hold onto them, the more confident the crypto community will feel in its sustainability and be tempted back in. Of course, that's all headline-dependent, which has been less of a headwind recently.

Daily Pivots: (S1) 129.57; (P) 130.34; (R1) 130.96; More...

Intraday bias in USD/JPY stays neutral and outlook is unchanged. On the downside, break of 127.20 will resume the whole decline from 151.93 and target 121.43 fibonacci level. Nevertheless, on the upside, break of 131.56 should confirm short term bottoming, and turn bias back to the upside for stronger rebound to 55 day EMA (now at 134.34).

In the bigger picture, the break of 55 week EMA (now at 131.47) raises the chance of medium term bearish reversal, but that's not confirmed yet. Strong support could be seen around 61.8% retracement of 102.58 to 151.93 at 121.43 and 38.2% retracement of 75.56 to 151.93 at 122.75 to bring rebound. But break of 131.56 resistance is needed to indicate bottoming first. Otherwise further fall will remain in favor.

Daily Pivots: (S1) 0.9185; (P) 0.9232; (R1) 0.9273; More...

Outlook in USD/CHF remains unchanged and intraday bias stays neutral. On the downside, sustained break of 61.8% projection of 1.0146 to 0.9355 from 0.9545 at 0.9056 will pave the way to 100% projection at 0.8754, which is close to 0.8756 long term support. Nevertheless, on the upside, break of 0.9407 should confirm short term bottoming and turn bias back to the upside.

In the bigger picture, rise from 0.8756 (2021 low) has completed at 1.0146, well ahead of 1.0342 long term resistance (2016 high). Based on current downside momentum, fall from 1.0146 should be a medium term down trend itself. Next target is a test on 0.8756 low. Strong support should be seen there to bring rebound. Still, further decline will now be expected as long as 0.9407 resistance holds, in any case.