- Following lower-than-expected Canadian CPI data, USD/CAD surged into the higher 1.3500s.
- This suggests that the Bank of Canada may not need to maintain interest rates at elevated levels, which is seen as a negative for the CAD.
- Traders are now preparing for the Federal Reserve meeting later in the day.
The USD/CAD pair continued its upward momentum on Wednesday, reaching the upper 1.3500s, driven by softer-than-expected inflation figures for February. This data provides the Bank of Canada with room to potentially ease its policy stance in the future.
Typically, a looser monetary policy entails lower interest rates, which can deter foreign capital inflows and have a negative impact on a currency. According to Statistics Canada, the headline Consumer Price Index (CPI) in Canada rose by 2.8% year-on-year in February, falling short of economists’ expectations of 3.1% and the previous month’s 2.9%.
Monthly headline CPI increased by 0.3%, below economists’ estimates of 0.6% but surpassing January’s 0.0%. Meanwhile, Canadian Core CPI grew by 2.1% in February compared to 2.4% in January, with a monthly increase of 0.1%, matching January’s figure.
This data suggests that the Bank of Canada might adjust its language to sound more dovish at the upcoming April meeting, potentially exerting downward pressure on the Canadian Dollar (CAD) but bolstering the USD/CAD pair.
David Doyle, head of economics at Macquarie, stated, “The 3-month moving average measures of inflation have significantly softened over the past two months. While this is an encouraging development that could lead to incrementally more dovish language from the BoC at its upcoming 10th April meeting, we still consider hopes for an imminent rate cut as premature.”
Fed meeting ahead
USD/CAD is anticipated to experience heightened volatility later today as the Federal Reserve concludes its March policy meeting and unveils its decisions at 18:00 GMT.
While the Federal Reserve (Fed) is not expected to adjust interest rates, there is a possibility of revisions to its quarterly forecasts and accompanying statement. These alterations could potentially reshape the outlook for interest rates and consequently impact the valuation of the US Dollar (USD).
Speculation is mounting that the Fed will revise its economic forecasts in the Summary of Economic Projections (SEP) and the “dot plot,” a graphical representation reflecting the Board of Governors’ consensus expectations regarding the future trajectory of interest rates.
In the December SEP, officials projected three 25 basis points (0.25%) rate cuts in 2024. However, some analysts now suggest a potential downward revision to two 25 bps cuts, reflecting sustained inflationary pressures.
Nordea Bank, for instance, indicated in a recent note that “the Fed will likely need to revise its growth and inflation projections higher for 2024.” This could result in a median FOMC dot plot showing only two rate cuts this year, compared to the previous projection for three rate cuts made in December 2023.
Such a development would be favorable for the USD and USD/CAD, potentially driving further upside for the pair.
