Canada’s CPI expected to rise

The Canadian dollar started the week with gains, but has reversed directions on Wednesday. USD/CAD is trading at 1.2978, up 0.47% on the day.

CPI expected to hit 7.4%

Canada releases the May inflation report later today, and the markets are bracing for another rise. CPI is expected to rise to 7.4%, which would be a sharp rise from the 6.8% gain in April, a 30-year high. In a sign of the times, today’s inflation report will include used car prices for the first time and give more weight to gasoline prices.

With no sign of the long-sought-after inflation peak, the Bank of Canada is under strong pressure to ratchet up its rate hikes. The BoC holds its next meeting on July 13th, and a CPI reading above 6.8% would virtually cement a massive 0.75% rate hike. The markets have priced in a 0.75% at about 80%. RBC and CIBC also expect the central bank to deliver a 0.75% increase.

The BoC has warned that it expects inflation to move higher in the near term and has signalled that it will raise rates towards the upper end of the 2%-3% neutral range. With the benchmark rate currently at 1.5%, that means that we can expect significant tightening in the second half of the year. The BoC is also looking to remain in sync with the Federal Reserve, which delivered a super-size 0.75% hike just last week.

There are no US releases on Wednesday, but there will be plenty of interest in what Fed Chair Powell has to say on Capitol Hill. The markets will be looking for clues on the direction of monetary policy. Last week, Powell said that further 0.75% hikes were unlikely, and a repeat of this stance could dampen sentiment towards the US dollar. At the same time, if Powell’s forecast for the US economy is on the pessimistic side, risk appetite could fall and send the greenback higher.

USD/CAD technical

• USD/CAD faces resistance at 1.2894. Above, there is resistance at the round number of 1.3000.

• There is support at 1.2706 and 1.2600.