By Areena FxThe US Dollar stands tall, favoured by solid US data and a hawkish Fed.
The BoC kept rates on hold on Wednesday but left the door open for a rate cut.
Later today, the PCE Price Index is expected to show sticky inflation levels.
The US Dollar has pulled back from two-month highs at 1.3840 against the Canadian Dollar, as the impact from the Fed and the BoC monetary policy decisions vanished. Still, downside attempts have been contained at 1.3815 so far, with the Greenback supported ahead of June’s US PCE Prices Index release.
On Wednesday, the Federal Reserve provided an additional boost to an already strong USD, shrugging off pressures to cut rates from US President Trump, keeping interest rates unchanged, and refusing to signal any monetary easing in the near term. Powell said that it might take months before the economic impact of Trump’s tariffs emerges, crushing investors’ hopes of a rate cut in September.
US GDP and ADP Employment data beat expectations
Somewhat earlier, US preliminary Gross Domestic Product data for the second quarter and ADP employment confirmed a resilient economy and a healthy labour market, giving fresh reasons for the Fed to be patient about rate cuts.
A few hours earlier, the Bank of Canada also left its benchmark interest rate on hold at 2.75%. Governor Macklem noted that the economy remains resilient despite the volatile global context and that inflation remains stubbornly high, but he also said that interest rates could be lowered, if needed, which added some negative pressure on the loonie.
Today, the main focus will be on the US PCE Prices Index report that is expected to show a slight pick up on the headline inflation, with the core reading, more relevant from the monetary policy perspective, steady at levels closer to 3% than to the bank’s 2% target for price stability.
Inflation FAQs
What is inflation?
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
What is the Consumer Price Index (CPI)?
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
What is the impact of inflation on foreign exchange?
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
How does inflation influence the price of Gold?
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.