CAD swept by US dollar tidal wave

The Canadian dollar is in negative territory on Thursday. In the North American session, USD/CAD is trading at 1.2310, down 0.27% on the day.

FOMC sends US dollar soaring

The FOMC meeting has triggered strong movement in the currency markets, with the US dollar registering broad gains against the majors. The Canadian dollar has not been immune, as USD/CAD climbed 0.74% on Wednesday is has made further gains on Thursday. This has sent the Canadian dollar to its lowest level since the end of April.

The Fed has sent out a consistent and constant message that it was committed to its ultra-loose policy. This message was reiterated again after the US CPI report for May beat forecast for a second straight month. After the inflation report, the Fed sought to dampen any expectations that higher inflation and a strong recovery would cause a shift in Fed policy. The Fed line was that there were no plans to tighten policy anytime soon, with the timetable for a rate hike no earlier than 2024.

Given this background, it’s understandable why the markets were expecting an uneventful FOMC meeting, in which the Fed would pay lip service to higher inflation, insisting that it was transitory and that the Fed was committed to its dovish stance.

However, the FOMC decision proved to be a shocker for the financial markets. The Fed provided an earlier timeframe for interest rate hikes, signalling on the dot plot that there could be two rate hikes in 2023. Fed Chair Powell urged the markets to take the shift in the dot plot “with a grain of salt”, but his pleas fell on deaf ears, as US yields rose and the US dollar has soared.

Canada is also reopening its economy, and pent-up demand has resulted in higher inflation. May CPI was higher than expected, with headline CPI y/y rising 3.6% (3.5% estimate) and Core CPI showing a gain of 2.8% (2.5% estimate).

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       USD/CAD Technical

USD/CAD has broken above several resistance lines, causing a shift in the technical outlook.

• USD/CAD is testing resistance at 1.2320. Close by, there is resistance at 1.2365
• USD/CAD has support at 1.2253. Below, there is support at 1.2210

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

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