After yesterday’s big upsurge in US inflation
, the focus will be on the Federal Reserve Chairman Jay Powell who is going to be testifying later, as well as the latest policy meeting from the Bank of Canada. The USD/CAD is therefore the chart to watch as we transition to the North American session, especially in light of the crude oil volatility after the Saudi Arabia and the UAE reportedly reached compromise over oil output
Powell: recovery hasn't progressed enough to begin tapering
Earlier, the Federal Reserve released the opening statement of Powell’s testimony on the Semiannual Monetary Policy Report to the Congress. Among other things, the text reads that:
“While reaching the standard of "substantial further progress" is still a ways off, participants expect that progress will continue. We will continue these discussions in coming meetings. As we have said, we will provide advance notice before announcing any decision to make changes to our purchases.”
The above statement also reads the FOMC will continue bond buying debate in coming meetings and that inflation is seen elevated in coming months, before moderating.
Taking everything into account the Fed Chair still thinks that inflation is going to be transitory, and the markets have responded by sending the dollar lower and stock index futures higher, as concerns over an imminent policy tightening eases. Powell’s testimony is starting at 17:00 BST, and more comments will be released then as he responds to questions regarding inflation and the future of monetary policy. So, Powell could still deliver further surprises. But for now, the market seems to have decided that the tapering talks will not be hurried in light of the latest big jump in inflation.
Still, Powell will be forced to defend the Fed’s policy and will have to try harder to convince the markets that price pressures are still going to be transitory. In particular, it will be very interesting to see how the Fed chair will respond to this latest surge in inflation if pressed by the Senate Banking Committee. Will he still stick to the “transitory” script or change tack slightly?
In the coming weeks and months, if the current trend for inflation continues then surely the FOMC will have to react and do so sooner. For now, though, the market is still giving the Fed the benefit of the doubt by the looks of things.
Bank of Canada policy decision due
Will rising inflation in the US and elsewhere influence the policy decisions from the Bank of Canada? Well, the Canadian central bank is widely expected to announce a third cut in QE to CAD 2 billion from 3 billion previously. This would be in response to the sharp rebound in employment and as a result of the relatively high covid vaccinations rate. The nation’s rate of vaccination is very high relative to the rest of the world, and soon half of the population will be fully vaccinated. Business surveys have been rising with majority of Canadian firms think the impact of the pandemic is behind them. Will the BOC share this optimism? Analysts expected the first post covid rate hike to be in the second half of 2022 and the central bank is likely to more or less re-iterate that view with the usual caveats.
USD/CAD finds resistance around 1.25
The USD/CAD has started to show signs of weakness near that key 1.25 resistance area with the Fed chair continuing to dismiss inflationary concerns and the Canadian central bank already reducing its QE purchases. What I am looking for next is a drop below the short-term bullish trend line and support circa 1.2370 on a daily closing basis. Meanwhile a clean break above the 200-day average and old high at 1.2650ish would invalidate any short-term bearish bias.
Source: ThinkMarkets and TradingView.com
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