- Risk sentiment improves ahead of US CPI
- Oil prices climb, stocks rally as risk sentiment improves
- CAD opens higher, but lags AUD and NZD
USDCAD Snapshot: 1.2960-64, overnight range 1.2956-1.3033, previous close 1.3029, previous close 1.3014, WTI open $103.00, Gold open $1,852.66
The Canadian dollar pulled back from the edge of a cliff yesterday and repeated the move overnight. USDCAD attempted to break above significant resistance in the 1.3050 area, which, if successful, would have kicked off another leg of USDCAD strength that targets 1.3500.
It didn’t happen, and prices dropped to 1.2964 on Tuesday. USDCAD traded similarly overnight, retreating from a 1.3033 peak to fall to 1.2956 in early NY. Today’s US inflation report will decide if the drop was merely consolidation ahead of another rally or the start of a wholesale retreat.
Soaring US inflation has been a critical factor behind the high-flying US dollar due to the prospect of aggressive Fed rate hikes to tame the inflation beast. Yesterday, a barrage of Fed officials warned that US rates would likely increase by 0.50% at the next few meetings and suggested that a more aggressive response was possible if inflation continued to climb.
Cleveland Fed President Loretta Mester said she expected 0.50% hikes at the next two meetings and then the Fed would decide if they needed to speed things up or slow them down. Fed Governor Christopher Waller said the US economy could withstand higher rates.
The April inflation data is key to the Fed outlook. Traders are hoping to see signs that inflation has peaked, and one of those signs will be if April CPI is lower than the 8.1% y/y and 0.2% m/m forecast. If markets conclude inflation may be peaking, the risk for more aggressive Fed rate hikes disappears, which will underpin stock markets.
Global risk sentiment also improved overnight after Chinese authorities said that transmission risks from COVID-19 in Shanghai had been effectively curbed.
The news boosted West Texas Intermediate oil prices, which rose from $98.26/barrel to $104.19/b in NY, supported by the API report that US crude inventories from 1.6 million barrels last week.
EURUSD chopped about in a 1.0527-1.0575 range, supported by hawkish comments from ECB officials. President Christine Lagarde said the ECB should end QE early in Q3, which points to a rate hike in July.
GBPUSD traded in a 1.2307-1.2389 band, but gains are limited due to the poor economic outlook and the latest Brexit issues.
USDJPY dropped to 129.60 from 130.48, coinciding with the decline in the 10-year US Treasury yield.
AUDUSD and NZDUSD rallied on the Shanghai COVID news and improved risk sentiment.
