Cdn. dollar dips after FOMC minutes

Canada’s inflation hits 30-year high

Inflation continues to rise and hit a new 30-year high in January. Headline inflation jumped 5.1% y/y, up from 4.8% a month earlier and above the consensus of 4.8%. Core CPI rose 4.3%, up from 4.0% and above the forecast of 3.5%.

The inflation report will no doubt increase the pressure on the Bank of  Canada to raise rates at its meeting on March 2^nd, with the markets pricing in the likelihood of a March hike at 100%. Investors have priced in as many as seven rate hikes this year, as the BoC is expected to be aggressive in order to wrestle down inflation, which shows no signs of easing. Energy prices are pointing upwards, with oil expected to hit USD 100 per barrel shortly. Supply chain disruptions and a lack of workers will only exacerbate inflationary pressures, which have been broad-based.

Fed to start rate rate-hike cycle

There were no surprises from the FOMC minutes, resulting in a muted market reaction. Officials indicated that interest rates are coming soon, strongly hinting that lift-off will take place in March. As well, the Fed plans a significant reduction in the balance sheet, which has ballooned to nine trillion dollars as a result of aggressive bond-buying in an effort to stimulate growth during the Covid pandemic. The Fed will end its QE programme in March as scheduled, although some members at the Fed meeting wanted to wind up the program earlier.

The Russia/Ukraine border remains extremely tense, although fears of a Wednesday invasion proved to be false.    The White House is disputing the Russian claim that it has moved forces away from the border and there were reports earlier today that Ukrainian forces had shelled a region that is Ukrainian territory but controlled by Russian separatists. This report has dampened risk appetite and pushed the US dollar slightly higher.

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USD/CAD Technical

• USD/CAD faces resistance at 1.2781 and 1.2828
•  1.2661 is under pressure in support and could be tested during the day. Below, there is support at 1.2588

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