Dollar Extends Pullback but Buying Pressure may Resurface in the run-up to the May CPI Report
Dollar Extends Pullback but Buying Pressure may Resurface in the run-up to the May CPI Report
The trend corridor for USDCAD held its ground despite the unexpected decision by the Bank of Canada to raise interest rates by 25 basis points at yesterday's meeting:
Based on numerous touches of the lower boundary line, the range of 1.33-1.3350 has proven to be an area of increased interest for buyers, so sellers did not dare to push further. Uncertainty related to the June meeting of the Federal Reserve is also weighing on the market, as its outcome could boost the dollar.
The Canadian regulator justified the rate hike by noting that inflation has remained significantly above the target level, which is not desirable because anchoring high inflation expectations in consumer minds reduces the effectiveness of monetary policy. However, the accompanying statement no longer includes the formulation that the central bank is ready to raise rates further if necessary. The Bank of Canada expects inflation to slow down to 3% in the summer, but achieving the target level by the end of 2024 is once again in question as that corresponding wording also disappeared from the statement.
Two major central banks, the Bank of Canada and the Reserve Bank of Australia, have now re-engaged in the race for monetary tightening. Interestingly, after the Bank of Canada's meeting yesterday, the likelihood of the Federal Reserve raising rates in June increased from 22% to 32%. Expectations for tightening by the European Central Bank also had to be revised:
As seen in the chart above, the yields on 10-year US and German bonds jumped by 10 basis points after the Bank of Canada announced the rate hike yesterday.
However, according to the latest Reuters poll, only 8 out of 84 economists surveyed expect a 25 basis point rate hike. The majority believe that Fed policy will remain unchanged in June.
The dollar is on the defensive today, but a key risk event, the CPI report, gives hope for a reversal closer to its release next Tuesday. Two critical levels where buyers may make their presence felt are 103.30 (June low) and 103 (lower boundary of the correction channel):
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