Bank of Canada’s interest rate decision takes center stage

The CAD strengthened yesterday, aided by a rather subdued dollar, and today Loonie traders await in anticipation for the interest rate decision from the central bank of Canada. The bank is expected to hike rates by 25 basis points, downshifting from two consecutive 50 basis points increases, lifting its key policy rate at 4.5%, the highest level since 2007.Currently the CAD OIS implies a 75% probability for such a scenario to materialize and should that be the case we may see the CAD receive support and strengthen against the dollar. On the flip side however, the central bank has already signaled that it probably reached its terminal rate and set an end of to its tightening cycle, leaving the CAD exposed to downward pressures down the road. Crucial will be the accompanied statement following the decision, where it could confirm whether the central bank’s assessment has changed since the last meeting as new data came in, whether more hikes are expected or whether the hike and hold projections will come to fruition. BoC Governor Macklem is to deliver a speech following the decision and should his comments carry a dovish undertone we may see CAD facing pressure.

Last week, Canada’s CPI print showcased that inflationary pressures eased further in December to 6.7% which reinforces the narrative that the bank should hike rates further in order to bring inflation back down to its 2% target level. But at the same time, higher interest rates increase the possibility of something breaking in the Canadian economy, with the spotlight falling over the housing market which is currently in rut, pressured by high mortgage rates. Nevertheless, the “hike by 25 bps and hold” scenario appears most plausible, however, for how long the rates will be kept unchanged is something to be seen. Currently, money market analysts foresee that BoC will be forced to abandon holding rates around mid-June and cut rates twice by the end of the year, to avoid tipping the economy into a recession. Shifting our attention towards the east, Australia in today’s early Asian session released its CPI print for Q4 and the results showcased that inflationary pressures accelerated to 7.8% exceeding expectations of 7.5% but also higher from the reading of the prior quarter of the 7.3% level. This was the highest quarterly print since 1990. Driving the headline rate higher were higher prices for food alongside housing, health and entertainment. More specifically, food prices rose the most in 16 years prosing a serious problem for average Australian consumers, who struggle with feel the heat from higher prices on essentials items. The AUD rose on the back of hotter than expected inflation print and is approaching its highest levels since August of 2022. The spotlight now falls on RBA and whether it will opt to ramp up its monetary tightening efforts and hike by more than 25 basis points, in order to bring inflation under control.

EUR/USD rose slightly higher yesterday, above the 1.0860 (S1) support level. We hold a bullish bias for the pair. Should the bulls reign over, we may see the pair breaking the 1.0980 (R1) resistance line and head to the 1.1080 (R2) level. Should the bears take charge we may see EUR/USD breaking the 1.0860 (S1) support line and aim for the 1.0740 (S2) support level. USD/CAD fell close to the 1.3345 (S1) level today and currently attempts to break below it. We hold a bearish outlook bias for the pair ahead of the BoC decision. Should the bulls take over, we may see USD/CAD breaking the 1.3520 (R1) line and aim for the 1.3465 (R2) resistance barrier. Should the bears maintain control, we may see break below the 1.3345 (S1) and the move lower, closer to the 1.3290 (S2) support base.

今日其他亮点:

Today we would also like to highlight Germany’s Ifo indicators namely the business climate, current conditions and expectations, for the month of January alongside the mom PPI input prices for December from the UK.