Canadian dollar powers higher after hawkish FOMC minutes

The Canadian dollar is higher on Thursday. In the European session, USD/CAD is trading at 1.3453, down 0.39%.

Minutes: Fed remains cautious about cutting rates

The minutes of the Fed’s January meeting didn’t contain any surprises. Fed members remained concerned about lowering interest rates too early and questioned “how long a restrictive monetary policy stance would need to be maintained”.  In other words, the “higher for longer” will remain in place for now. The most important consequence of this policy is that a March cut is off the table, with only a 5% likelihood, according to the CME’s FedWatch tool.

The markets were exuberant after the Fed finally jumped on the rate-cut bandwagon in December and priced in a first cut in March. Those expectations have been in steady decline for two reasons.

First, many of the key US releases, such as nonfarm payrolls, has been stronger than expected, indicative of a robust US economy that may not need a rate cut just yet. Second, the Fed has consistently pushed back against a rate cut in March, arguing that a premature cut could cause significant damage if inflation reversed directions and moved higher, which would force the Fed to zigzag and raise rates.

The Fed’s uneasiness about lowering rates too early was apparent in the minutes and also in comments from Fed Governor Michelle Bowman on Wednesday, who said that the current economic climate was not right for a rate cut. Bowman has been hawkish on inflation and said last month that she would consider raising rates if inflation stalled or reversed and moved higher.

Canada releases December retail sales today and the markets are expecting a strong report. Retail sales are expected to rise 2.5% y/y, after a 1.8% gain in November. Monthly, the market estimate stands at 0.8% m/m, following a 0.2% decline in November.

USD/CAD Technical

• USD/CAD is testing support at 1.3500. Below, there is support at 1.3415
• 1.3571 and 1.3656 are the next resistance lines