BOC tapers again, Powell stays dovish

The Canadian dollar posted considerable gains earlier in the day but has retreated. Currently, USD/CAD is trading at 1.2491, down 0.18%.

BoC scales back QE

At today’s policy meeting, the Bank of Canada maintained its key lending rate at 0.10%, as expected. The bank tapered its bond-buying program for a third straight month, reducing its weekly purchases from CAD 3 billion to 2 billion dollars. While tightening policy at the meeting, the BoC is still sounding dovish about the economy. The bank cut its growth forecast for 2021 from 6.5% to 6.0% and says it does not expect to raise rates prior to H2 of 2022.

What’s next for the BoC? There are expectations that the bank could wind up asset purchases by the end of the year, with rate hikes to follow. This exit strategy will depend on the Canadian economy continuing to gain steam, but a resurgence of the Covid pandemic could delay these plans.

The Federal Reserve has long insisted that higher inflation levels are transitory and that it plans to maintain its dovish policy stance. However, this position is becoming increasingly difficult to defend, especially in light of the latest surge in US consumer inflation. CPI for June jumped 5.4% and the core reading rose 4.5%, its highest level since 1991. The Fed has tried to adjust to the shifting sands and adopted a more hawkish tone when it projected two rate hikes in 2023, but even that may not be enough for the markets.

Fed Chair Jerome Powell’s testimony, ahead of his appearance in the House later today, does not contain anything new and reiterates the central bank’s dovish stance. Powell said that the economy would have to show “substantial progress” before the Fed tapers stimulus and policymakers will discuss the issue in coming meetings.

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       USD/CAD Technical

• USD/CAD faces resistance at 1.2594. Above, there is resistance at 1.2735
• On the downside, there is support at 1.2307. Below, there is support at 1.2161

For a look at all of today’s economic events, check out our economic calendar. www.marketpulse.com/economic-events/

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