Canadian Dollar holds near lows ahead of US CPI, BoC’s monetary policy decision

USD/CAD eases to the 1.3940 area on Wednesday after hitting fresh year-to-date highs at 1.3969.
A retaliatory US attack on Iran keeps risk appetite subdued and US Dollar dips limited.
Later on Wednesday, the US CPI release and the BoC's monetary policy are likely to set the pair's direction.

Guillermo Alcala FXStreet

The Canadian Dollar (CAD) edges up against the US Dollar (USD) on Wednesday, with the USD/CAD pair trading near1.3940 after hitting year-to-date highs at 1.3969 on Tuesday. The safe-haven USD remains supported by fresh tensions in the Middle East, as investors await the release of US inflation figures and the Bank of Canada’s (BoC) monetary policy decision, due later on the day.

Risk appetite remains subdued, following reports of a US retaliatory attack on Iran, after an American Apache helicopter was downed while patrolling the Strait of Hormuz on Monday. Markets, however, remain hopeful of a negotiated end to the war, which is keeping the safe-haven US Dollar from rallying higher and Oil prices on a declining trend.

Later on Wednesday, investors will shift their focus to the US Consumer Price Index (CPI) release, which is expected to show that inflation accelerated in May at its fastest pace in the last three years. These figures, coupled with the strong US Nonfarm Payrolls (NFP) report released on Thursday, are likely to boost expectations of Federal Reserve rate hikes later in the year.

In Canada, the BoC is widely expected to leave its monetary policy unchanged for the fifth consecutive meeting, and all eyes will be on Governor Tiff Macklem’s press conference for further insight about the bank's forward path. The mix of high inflationary pressures and technical recession has left investors pondering whether the next move will be a rate hike or a cut.

Economic Indicator

Consumer Price Index (YoY)

Inflationary or deflationary tendencies are measured by periodically summing the prices of a basket of representative goods and services and presenting the data as The Consumer Price Index (CPI). CPI data is compiled on a monthly basis and released by the US Department of Labor Statistics. The YoY reading compares the prices of goods in the reference month to the same month a year earlier.The CPI is a key indicator to measure inflation and changes in purchasing trends. Generally speaking, a high reading is seen as bullish for the US Dollar (USD), while a low reading is seen as bearish.

Why it matters to traders?

The US Federal Reserve (Fed) has a dual mandate of maintaining price stability and maximum employment. According to such mandate, inflation should be at around 2% YoY and has become the weakest pillar of the central bank’s directive ever since the world suffered a pandemic, which extends to these days. Price pressures keep rising amid supply-chain issues and bottlenecks, with the Consumer Price Index (CPI) hanging at multi-decade highs. The Fed has already taken measures to tame inflation and is expected to maintain an aggressive stance in the foreseeable future.

Economic Indicator

BoC Interest Rate Decision

The Bank of Canada (BoC) announces its interest rate decision at the end of its eight scheduled meetings per year. If the BoC believes inflation will be above target (hawkish), it will raise interest rates in order to bring it down. This is bullish for the CAD since higher interest rates attract greater inflows of foreign capital. Likewise, if the BoC sees inflation falling below target (dovish) it will lower interest rates in order to give the Canadian economy a boost in the hope inflation will rise back up. This is bearish for CAD since it detracts from foreign capital flowing into the country.

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