The Canadian dollar strengthened Wednesday, despite a dovish rate hike by the Bank of Canada, as the USD has come under severe selling pressure broadly, helping the CAD to advance.
Ahead of the US close, the USD/CAD pair traded 0.4% weaker at around 1.35560.
BoC disappoints investors
The Bank of Canada’s (BoC) decision to raise rates by 50 basis points on Wednesday disappointed market participants who were anticipating a 75 bps increase in light of Canada’s economy’s struggles with inflationary levels not seen in 30 years. The BoC also declared that its quantitative tightening strategy would remain in place.
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According to the BoC, global inflation is still strong and widely based, as a result of rising commodity prices brought on by Russia’s invasion on Ukraine. The BoC recognized that slowing down inflation by tightening monetary policy is “weighing on economic activity globally.” Global inflation is anticipated to decline as economies weaken and supply disruptions subside.
Weak economic outlook
In terms of the global forecast, the BoC forecasts a recession in the Eurozone and no growth in the US economy. Although China’s economy seems to be improving, the property market will restrain expansion.
The BoC believes that the domestic economy is experiencing high demand and a competitive labor market. An ample supply of goods and services maintains high inflationary pressures. Additionally, “the price of services rose sharply” as a result of the economy’s complete reopening.
Price pressures are still widely spread, affecting the Bank’s preferred gauges of core inflation, which “are not yet providing substantial indications that underlying price pressures are lessening,” even though Canada’s CPI dropped from 8.1% to 6.9%.
As a result, the BoC Governing Council decided that policy rates must increase further. This decision will depend on how the BoC Council evaluates how tighter circumstances would affect demand, inflation, and how supply disruptions will be resolved.
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Furthermore, Governor Tiff Macklem stated that although the tightening phase is nearing its conclusion, it has not yet been completed.
“We are still far from the goal of ensuring inflation is low, stable, and predictable. We expect growth to stall in the next few quarters; once we get through this slowdown, growth will pick up.”
Technically speaking, the next support is seen near 1.35, and if not held, we might see a further decline toward the 1.30 level. On the upside, the pair must close above 1.3650 to gain bullish momentum.