Wednesday morning’s US inflation report, the consumer price index (CPI), indicated that inflation rose by 3.3% annually last month, while core prices climbed by 3.4%. This marks the smallest year-over-year increase since 2021. The cooling inflation could boost the likelihood of the Federal Reserve cutting interest rates later this year, especially as the Fed concludes its policy meeting today.
Investors are increasingly optimistic about potential interest-rate cuts by the Federal Reserve following Wednesday’s encouraging inflation data. According to CME Group data, the interest-rate futures market recently indicated a 71% chance that the Fed will cut rates at least once by the end of its September 17-18 meeting, up from 53% on Tuesday. Similarly, the market is pricing in a 69% chance that the Fed will cut rates at least twice by the end of the year, up from 52% on Tuesday.
Any rate cuts this year by the Fed would have significant implications for the Bank of Canada (BoC) and the Canadian dollar (CAD). Firstly, it provides the BoC with more flexibility to cut rates in Canada without worrying as much about the interest rate differential between the US and Canada. Secondly, one of the key factors that has been supporting the US dollar (USD) has been the relative strength of the US economy compared to other developed countries. With inflation easing in the US, we might see a weakening of the US economy.
For the USD/CAD currency pair, this means the downside risk for the Canadian dollar has now been reduced. The CAD is less likely to push into the 1.38 or higher range and is more likely to trade between 1.36 and the mid 1.37 until the next BoC meeting in July.
The Canadian dollar is currently trading at 1.3684 CAD against the US Dollar.
