- The Bank of Canada announced its last decision on interest rates, maintaining its reference rate by 2.75%.
- The European Central Bank prepares for its decision on the fees on Thursday, where interest rates are expected to decrease to 0.25%, reducing the 2%reference rate.
- The EUR/CAD operates below the simple mobile average (SMA) of 20 days, providing resistance about 1,5632.
The EUR/CAD is operating flat in the early hours of the American session on Wednesday after the Bank of Canada (BOC) announced its decision to maintain interest rates without changes in 2.75%.
After the decision of the Bank of Canada, the torque has continued to operate in a narrow area, with resistance forming in the simple mobile average (SMA) of 20 days about 1,5632 at the time of writing.
Since interest rates remain a key driving force behind the exchange rate of many important currency pairs, the divergence of monetary policy between the ECB and the BOC seems to be largely discounted, with the markets focused on the broader economic risks.
Will you cut the ECB or maintain your decision on the fees on Thursday?
After the inflation data of the Eurozone showed clear signs of relief on Tuesday, the publication of the purchasing managers index (PMI) on Wednesday provided a mixed image on the health of the manufacturing and services sectors throughout the Eurozone.
Although the data of the PMI of Italy and France exceeded the estimates, Germany’s data continued to disappoint, suggesting that the business confidence and the growth prospects of the country are still umbrella.
The reading of the PMI of Hamburg Commercial Bank (HCOB) for May, published on Wednesday, did not reach the estimate of 48.6, being 48.5, while the HCOB Services PMI was located at 47.1, below the estimate of 47.2. With both readings below the analysts’ forecasts, Germany’s economy is showing signs of weakening, since confidence in the country has recently suffered.
The combination of clear signals of an economic deceleration and the decrease in inflation is perceived as a warning sign of a possible recession, since consumer spending and the demand for goods and services will fall.
For Canada, labor productivity, published by Statistics Canada, fell below the estimates of analysts of a 0.4% increase in the first quarter, with intertrimestral reading by printing at 0.2% in the first quarter.
FAQS Central Banks
Central banks have a key mandate that consists in guaranteeing the stability of prices in a country or region. Economies constantly face inflation or deflation when the prices of certain goods and services fluctuate. A constant rise in the prices of the same goods means inflation, a constant decrease in the prices of the same goods means deflation. It is the Central Bank’s task to keep the demand online by adjusting its interest rate. For larger central banks, such as the US Federal Reserve (FED), the European Central Bank (ECB) or the Bank of England (BOE), the mandate is to maintain inflation about 2%.
A central bank has an important tool to raise or lower inflation: modify its reference interest rate. In precommunicated moments, the Central Bank will issue a statement with its reference interest rate and give additional reasons of why it maintains or modifies it (cut it or the SUBE). Local banks will adjust their savings and loan rates accordingly, which in turn will make it difficult or facilitate that citizens obtain profits from their savings or that companies ask for loans and invest in their businesses. When the Central Bank substantially rises interest rates, there is talk of monetary hardening. When it reduces its reference rate, it is called monetary relaxation.
A central bank is usually politically independent. The members of the Central Bank Policy Council go through a series of panels and hearings before being appointed for a position in the Policy Council. Each member of that council usually has a certain conviction on how the Central Bank should control inflation and the consequent monetary policy. Members who want a very flexible monetary policy, with low types and cheap loans, to substantially boost the economy, while comprising with inflation slightly greater than 2%, are called “pigeons.” Members who prefer higher types to reward savings and want to control inflation at all times are called “hawks” and will not rest until inflation is located at 2% or just below.
Normally, there is a president who directs each meeting, has to create a consensus between the hawks or the pigeons and has the last word when the votes must be divided to avoid a draw to 50 on whether the current policy must be adjusted. The president will pronounce speeches, which can often be followed live, in which he will communicate the current monetary position and perspectives. A central bank will try to boost its monetary policy without causing violent oscillations of the fees, the actions or their currency. All members of the Central Bank will channel their position towards the markets before a monetary policy meeting. A few days before a monetary policy meeting is held and until the new policy has been communicated, the members are prohibited from speaking publicly. It is what is called a period of silence.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
