The Canadian Dollar is gaining against the embattled US Dollar. All market participants are watching major economic reports and central bank announcements like hawks. The US Dollar continues to feel downside pressure. Lingering worries over the roots of the US-China trade war and increasing anxiety of an impending recession in the U.S. add to this pressure. As things continue to develop, all eyes are on the next Consumer Price Index (CPI) report from Statistics Canada. With this report, we aim to provide some clarity on what exactly inflation is doing in Canada.
That’s what happened on March 12 when the BoC implemented its seventh-straight cut to Canadian interest rates. This decision may be the biggest policy pivot towards economic stimulus yet. With this latest cut, the Fed’s main rate has fallen to its lowest level since 2022. The BoC intends to switch to its core CPI estimates very shortly. These core estimates will provide us with a better understanding of the trend of underlying inflation by removing the more erratic food and energy sectors. The market expects annualized inflation to remain at 2.6%, the same as February’s reading.
Canadian Dollar Performance
The Canadian Dollar has actually held up remarkably well and strengthened against the bloodied, bludgeoned US Dollar. The USD/CAD pair continues to linger around its multi-month low of 1.3827, set last week. All of that demonstrates an underlying bullish strength to the Canadian dollar, expressing skepticism about CAT hitting lower lows in the future. Sinclair says this consolidation could indicate a future reversal for the USD/CAD pair. This could be highly pertinent as the duo hover around important bastions of support.
Valeria Bednarik, Chief Analyst at FXStreet, commented on the technical analysis of the pair:
“USD/CAD is on a pause ahead of first-tier events, but the technical risk remains skewed to the downside.”
This month’s low at 1.3827 provides short-term support on USD/CAD. Analysts caution that any significant swing in CPI numbers would impact chip trading tactics. Bednarik further stated:
“The monthly low at 1.3827 is the immediate support ahead of the 1.3470 region. The CPI needs to be shockingly poor to trigger a break below the latter.”
Today’s market dynamics are a tangible result of that economic push-and-pull — including the impact of interest rates and inflation expectations, along with other factors.
Economic Indicators and Market Reactions
The release of Statistics Canada’s CPI report this Tuesday will be critical, and perhaps a make-or-break report for many market participants. The consensus forecasts called for annualized inflation for March to hold even at 2.6%. This would be a repeat of February’s numbers and show a continued easing in consumer prices despite a continued crunch in the economy elsewhere.
This was driven by core BoC CPI being up 0.7% month-over-month in February and 2.7% year-over-year. These numbers point to a hopeful reality. While overall inflation is stable, many core inflation metrics are becoming increasingly worrisome, placing pressure on future monetary policy decisions from the Bank of Canada.
Markets are waiting for these first reports with bated breath, and that’s having an effect on currency pairs already. Specifically, GBP/USD has dropped sharply as the US Dollar is seeking to strengthen overall. The ongoing US-China trade tensions have created an additional layer of complication and uncertainty. This is forcing traders to be more wary towards potential changes in relative currency values.
Future Outlook for Bank of Canada
The Bank of Canada makes its next monetary policy announcement on Wednesday. Analysts expect it will maintain its benchmark interest rate at 2.75%. This decision is a big deal, it shows the balancing act that the central bank must perform in taming inflation while facilitating a stable recovery.
Market analysts are waiting with baited breath to see how the BoC will continue to respond to outsized data and external pressures. Though inflation is currently stable. Any unexpected news in the CPI report has potential to move market sentiment and change the trading outlook.
With domestic economic indicators and deteriorating international trade relations set to dominate headlines in the coming weeks, the Canadian Dollar’s direction remains unclear. Keep an eye out for these issues as they develop! Further, uncertainty continues to hang like a storm cloud over global markets. Traders are always on the lookout, waiting for any indication that might trigger major moves across currency pairs.