US Dollar Steadies Ahead of Inflation Data and Fed Rate Decision; Canadian Dollar Leaps After Rate Hike

191

The US dollar inched upward against the yen on Wednesday, as investors hold their breath for the US inflation data due for May and the Federal Reserve’s imminent interest rate decision next week. Meanwhile, the Canadian dollar took a leap after the Bank of Canada implemented a rate hike.

Market participants anticipate the US central bank to maintain a steady rate next Wednesday as they assess the repercussions of recent rate hikes. However, Fed fund futures traders foresee another rate increase in July.

Tuesday’s consumer inflation data is anticipated to demonstrate a price increase of 0.30% in May. Bipan Rai, North American head of FX strategy at CIBC Capital Markets in Toronto, expects a substantial degree of consolidation leading up to the Fed’s decision next week, stating, “That CPI number’s going to be critical for the Fed decision as well. To me it makes sense that we don’t see large bets placed either way at this point.”

The US dollar rose by 0.31% to 140.10 yen, while the euro saw a slight increase of 0.11% against the US dollar, climbing to $1.0703. The dollar index displayed negligible changes for the day, standing at 104.07.

Wednesday’s data revealed that the US trade deficit swelled to its highest in eight years in April, owing to a revival in goods imports and a decline in energy product exports.

Most expectations for the Fed to reduce rates this year have been dismissed by traders, given that inflation continues to exceed targets. “There is persistence and resilience in inflation in the U.S., but also in much of the G10, as well, meaning that central banks are likely to be cautious,” noted Jane Foley, chief strategist at Rabobank.

The Canadian dollar rallied after the Bank of Canada raised its overnight benchmark rate to 4.75%, marking the highest level in 22 years. Consequently, the US dollar fell by 0.23% against the loonie, hitting C$1.3371.

Despite potential pressure on the greenback due to foreign central banks’ rate hikes, the likelihood of an additional Fed rate hike in July could offset losses.

DRW Trading’s market strategist, Lou Brien, suggested that the Fed might indicate next week that they aren’t finished raising rates. He added, “that might short circuit the idea of the dollar getting hit because the Fed is going to be out of step with Canada, Australia and probably the ECB during this month’s meeting, because they’ll still have the idea that there’s more to come.”

The Australian dollar declined after the Reserve Bank of Australia elevated rates by a quarter-point to an 11-year peak of 4.1%. The central bank chief intensified warnings of more rate hikes to come in a bid to mitigate increasing price pressures. The Australian currency finally fell by 0.25% to $0.6657, having earlier hit a high of $0.6718, a level not seen since May 11.

Meanwhile, the offshore Chinese yuan fell to its weakest against the US dollar since November 30, after data revealed that China’s exports for May plummeted faster than anticipated while imports also dropped. These trends stem from manufacturers struggling to find overseas demand and sluggish domestic consumption. The yuan closed at 7.1465 against the dollar.