Canadian dollar eyes BoC, US inflation

USD/CAD is trading quietly at the 130.00 line, with a busy day ahead. The Bank of Canada holds its rate meeting and the US posts the June inflation report.

Bank of Canada could deliver 75bp salvo

The Bank of Canada is expected to press the pedal to the gas later today, with the markets expecting a supersize 75bp hike. This would bring the cash rate to 2.25%. Similar to the Fed, the BoC is showing that it can be aggressive with its rate policy as it pulls out all the steps to curb enemy number one, which is runaway inflation. In May, Canada’s inflation rate rose to 7.7%, a four-decade high. Inflationary pressures have been broad-based, raising fears of inflation expectations becoming unanchored.

A massive 75bp move by the BoC should give a boost to the Canadian dollar, but the gains could be modest if the market has fully priced in the move. As well, today’s US inflation report could affect the direction of USD/CAD in the North American session.

In the US, the June inflation report is being eagerly anticipated by the financial markets. Headline inflation is expected to rise to 8.8% YoY, up from 8.6% in May. Core CPI is expected to ease to 5.8%, down from 6.0%. If the numbers are higher than expected, market reaction will be negative and the dollar should get a boost. Conversely, if inflation is lower than expected, it will raise hopes that inflation has peaked, raising risk sentiment and likely pushing the dollar lower.

The inflation report could play an important role in Fed decision-making ahead of the July 27^th rate meeting. The Fed is widely expected to hike by 75bp at the meeting, but could consider a smaller hike if inflation is weaker than expected, which would make the US dollar less attractive to investors.

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USD/CAD Technical

• USD/CAD has support at 1.2953 and 1.2822
• There is resistance at 1.3068 and 1.3199

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