USD/CAD – Canadian dollar hits 2-month high as BoC pauses again

• Bank of  Canada pauses rates for second straight month
• US headline inflation drops to 5%, core rate rises to 5.6%
• Canadian dollar climbs to highest level since February 16

The Canadian dollar has extended its rally, and is up 0.29% today, trading at 1.3402 in Europe.

Bank of Canada holds rates

There wasn’t much drama ahead of the Bank of Canada’s decision to hold rates, as the non-move was widely expected. The benchmark cash rate is at 4.5% and the rate statement said that the BoC was prepared to raise rates “if needed to return inflation to the 2% target”. The BoC’s growth forecast for 2023 was upwardly revised to 1.4%, up from 1.0%. This pleased investors and has boosted the Canadian dollar.

US inflation report sends mixed signals

The Fed and the markets eagerly awaited Wednesday’s March inflation report, but the mixed signals mean that little may have actually changed with regard to the Fed’s rate path. Gasoline and food prices fell but housing costs remained high.

The good news was that headline inflation fell from 6.0% to 5.0%, lower than the consensus estimate of 5.2%. The bad news was that the core rate rose to 5.6% as expected, nudging up from the 5.5% read in February. Investors weren’t quite sure how to respond to the data – equities initially rose but the rally soon faded.

After the inflation release, Fed member Barkin expressed concern that core inflation continues to run above 5%. Barkin noted that demand is cooling but the job market and inflation remain strong.

Market pricing continues to sway ahead of the Fed meeting on May 4th. The odds of a 25-basis point hike are currently at 66%, according to the CME Group. This is down from the 72% probability prior to the inflation report. It was only a week ago that the odds of a 25-bp hike or a pause were split 50/50 and I expect further repricing ahead of the meeting. The markets expect the current rate-tightening cycle to end soon, with a few rate cuts expected by the end of the year.

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USD/CAD Technical

• USD/CAD is testing support at 1.3436. Below, there is support at 1.3356
• 1.3486 and 1.3566 are the next resistance lines

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