Forget about a quiet and calm Wednesday. The markets will be treated to two key events today. Canada releases consumer inflation for June (12:30 GMT, followed by the FOMC policy meeting (18:00 GMT). Either event could have a significant impact on USD/CAD, which is trading quietly at 1.2577.
Will the Canadian dollar get a boost today? The currency has been sluggish, as USD/CAD has jumped 4.3% since June 1. Inflation has been the buzzword in the US for months, with the Fed insisting that inflation is transitory, despite a sharp jump in CPI. In Canada, CPI came in at 3.6% in May, and the markets are keeping a close eye on the June release. The consensus is for a reading of 3.2%, but anything higher will raise speculation that the Bank of Canada may have to ditch its script that inflation is transitory, a message that the Fed has adhered to with success even with a surge in US inflation.
The BoC recently scaled back its asset purchases, but it has remained dovish on interest rate policy, saying that it will maintain ultra-low rates of 0.25% until at least the second half of 2022. However, if inflation remains at levels well above the Bank’s target of 2%, policymakers will have to consider raising rates ahead of schedule in order to curb inflation. Consumer inflation expectations are above 3%, and this is an important indicator since inflation expectations can translate into actual inflation figures.
After Canada’s CPI release, the market focus will shift to the FOMC policy meeting, the last meeting before the Jackson Hole symposium and the September policy meeting. The Fed is unlikely to announce a taper, but analysts will be combing through the rate statement, looking for any subtle changes in language as well as any hints of the ‘T’ word. Any changes in the rate statement’s language could shake up the US dollar. Ahead of the FOMC meeting, though, the markets are likely to remain cautious and in a wait-and-see mode.
USD/CAD Daily Chart
- USD/CAD faces resistance at 1.2777. Above, there is resistance at 1.2916
- On the downside, there is support at 1.2459. Below, there is support at 1.2352