- Fed hikes and repeats next move is “data dependent.”
- An ECB 25 bp rate hike is a foregone conclusion..
- US dollar
USDCAD: overnight range 1.3149-1.3187, close 1.3168, WTI 78.65 Gold $1957.25
The Canadian dollar experience some volatility following the widely expected 25 basis points (bp) rate hike by the Fed. The Federal Open Market Committee (FOMC) raised the overnight rate to 5.50%, reaching a twenty-two-year peak, and issued a somewhat hawkish statement, hinting that further rate hikes might be on the horizon. The Fed justified the move by citing an extremely tight labor market and persistently high inflation.
Despite the Fed's warnings of potential future rate increases, traders are skeptical. The CME FedWatch tool suggests that yesterday’s rate hike might be the last one for this cycle, with the first rate cut expected on March 20, 2024. Investors will closely scrutinize top-tier US economic data, including weekly jobless claims, Durable Goods Orders, and preliminary Q2 GDP reports, to gauge the market's direction.
The Canadian dollar is also finding support from the somewhat hawkish tone of the Summary of Deliberations from the July 12 BoC meeting. The report expressed concerns about consumer spending and inflation, indicating that returning to the 2% target might take longer than previously anticipated due to core inflation's persistence and opposing demand forces.
Despite the Canadian dollar's resilience, the benchmark fed funds rate stands at 5.5%, while the BoC policy rate is at 5.0%.
Additionally, the Canadian dollar is benefitting from rising oil prices, with West Texas Intermediate surging nearly 13% since the beginning of June.
In the European session, the European Central Bank (ECB) meeting takes the spotlight. Although a 25 bp rate increase is expected, it may not generate much excitement, as President Christine Lagarde has already indicated the move. The real focus will be on the press conference, where traders hope to gain insights into the ECB's terminal rate.
EURUSD traded in a range of 1.1079-1.1149 ahead of the meeting, while GBPUSD remained steady within a 1.2926-1.2694 range. Today's price action in GBPUSD will be influenced by EURGBP price swings following the ECB meeting.
In Asian trading, USDJPY dipped from 140.24 at the NY close to 139.24, only to rebound to 140.48 in early NY trading. Prices are supported by the US 10-year Treasury yield at 3.869% and the anticipation that the BoJ will leave monetary policy unchanged on Friday.
Meanwhile, AUDUSD rallied from 0.6758 to 0.6820 before retracing slightly to 0.6793 in NY trading. The rally is fueled by improved risk sentiment, backed by the belief that the Fed has reached its terminal rate.
