Canadian Dollar underperforms at the start of BoC policy week

The Canadian Dollar faces selling pressure against its major peers, with investors awaiting the BoC’s policy announcement.
Investors expect the BoC to leave interest rates unchanged at 2.25%.
US President Trump expresses confidence that both Iran and Israel are looking for ceasefire.

Sagar Dua FXStreet

The Canadian Dollar (CAD) trades lower against its major currency peers in the European trade on Monday amid caution surrounding the Bank of Canada’s monetary policy announcement on Wednesday.

The Loonie faces selling pressure amid expectations that the BoC will hold interest rates steady at 2.25%, even as Canada’s Consumer Price Index (CPI) grew at a faster pace of 2.8% Year-on-Year (YoY) in April against the preliminary reading of 2.4%.

Meanwhile, the Canadian labor market data for May has come in stronger than projected. The report shows that the economy created 87.8K fresh jobs, significantly higher than 10K estimates. In April, the Canadian employers fired 17.7K workers. Canada’s Unemployment Rate dropped to 6.9%, while it was expected to remain steady at 6.9%.

On the global front, a sharp corrective move in the Oil price following comments from United States (US) President Donald Trump that both Israel and Iran are looking for a ceasefire has also weighed on the Canadian Dollar. The appeal of North American currency diminishes when oil prices start dropping, given that the Canadian economy is a net energy exporter.

“Both sides, Israel and Iran, are looking to do an immediate CEASEFIRE! Final negotiations on “Peace” are proceeding, subject to ignorance or stupidity getting in its way. The Blockade will remain in place, and in full force and effect, until a “Final Deal” is reached. Things should move quickly.” US President Trump wrote on Truth Social.

In the US, investors await the US Consumer Price Index (CPI) data for May, which will be released on Wednesday. The US inflation data will significantly influence market expectations for the Federal Reserve’s (Fed) monetary policy outlook.

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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