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USD / CAD - Canadian Dollar rally stalls

- US CPI fuels early rate cut hopes.

- European equities and US futures treading water ahead of weekly jobless claims.

- US dollar opens lower, CAD underperforms.

USDCAD: 1.3624, overnight range 1.3590-1.3629, close 1.3602, WTI $78.34, Gold, $2385.10

The Canadian dollar rose sharply after US April inflation data was released yesterday. Headline inflation rose 0.3% m/m (forecast 0.4%, previous, 0.4%) while core-CPI was unchanged at 0.3%. Analysts worked really hard to put a positive spin on the numbers which, by and large, were nothing special. At best, the data was encouraging for those hoping inflation pressures were easing, but it certainly didn’t justify pushing expectations for rate cuts forward, from November to September.

But that’s what happened. The probability of a September 18 rate cut rose to 70% as the US 10-year Treasury yield fell from 4.43% to a low of 4.31% overnight. Wall Street closed with impressive gains and Asian equity markets followed suit, led by a 1.65% rally in the Australian ASX 200. European traders were far more cautious, and the major bourses are all underwater. S&P 500 futures are flat.

Traders are looking to today’s weekly jobless claims data for more evidence that the labour market is rebalancing. Weekly jobless claims are expected to rise to 220,000, which is 13,000 less than last week but still a level consistent with a cooling job market. A substantially higher-than-expected result will reignite US dollar selling pressure and raise the odds of an earlier-than-expected Fed rate cut.

However, there are plenty of other economic releases that could muddy the rate outlook, including the Philadelphia Fed Manufacturing Survey, Building Permits, Housing Starts, Capacity Utilization, and Industrial Production. In addition, FOMC policymakers Vice Chair Barr, Cleveland Fed President Loretta Mester, and Atlanta Fed President Raphael Bostic are speaking.

EURUSD traded quietly in a 1.0866-1.0896 band with traders sidelined ahead of the US data dump this morning.

GBPUSD retreated from its overnight peak of 1.2701 to 1.2654 in early NY trading, partly because Wednesday’s rally may have been overdone. The BoE is expected to cut interest rates in June, and if Fed Chair Powell is to be believed, the Fed is in no hurry to cut rates, despite what the market thinks.

USDJPY churned inside a 153.60-154.96 range. The currency pair is on the defensive due to lower US Treasury yields and weak Japanese GDP data. (Q1 GDP -0.5% q/q vs 0.1% previously).

AUDUSD caught a bid and climbed from 0.6674 to 0.6714, with better-than-expected unemployment data giving it an added boost.