USD/CAD volatile after the BOC decision and after the US CPI.

• USD/CAD is trading in a 120 pip range, courtesy of Level 1 data from both countries.
• The Bank of Canada (BoC) raised rates by 100 basis points and will continue to tighten them.
• The consumer price index (CPI) for June in the US rose by 9.1% year-on-year, the highest level in 40 years.
• The probability that the Federal Reserve will raise rates by 100 basis points on money market futures has risen to 82%.

The USD/CAD slumps after the Bank of Canada (BoC) carried out an unexpected 100 basis point rate hike at its July meeting, raising rates to 2.50% vs. the 2.25% estimated by market participants, and after a US inflation reading that topped 9%.

USD/CAD is trading at 1.2958 at the time of writing, with the pair oscillating in a volatile session, reaching a daily low/high around the 1.2945-1.3060 range, an area where the pair will hold minus for a new catalyst to break the range.

USD/CAD is trading volatile due to the Bank of Canada’s surprise 1% rate hike and US inflation above 9

In its monetary policy statement, the Bank of Canada said that the Governing Council (GC) decided to bring forward interest rates and stressed that rates will have to go higher. The BoC stated that inflation is expected to hover around 8% in the coming months and has widened further, with more than half of the CPI components rising more than 5%. Although the war in Ukraine and supply chain disruptions are to blame, domestic price pressures from excess demand are becoming more prominent. The BoC also acknowledged that the labor market is tight and rising wage pressures will keep inflation high.

Regarding economic growth, the Bank expects the economy to grow by 3.5% in 2022, while for the second quarter it estimates growth of 4% and a decline in the third quarter to 2%.

Meanwhile, earlier in the day, US inflation topped the charts with an increase of 9.1% year-over-year, marking a new 4-decade high, according to the US Department of Labor, which also revealed that the so-called basic CPI, which excludes volatile elements such as food and energy, stood at 5.9%, below May, but above estimates. Regarding the higher inflation reading, STIRs money market futures have fully priced in a 75 basis point rate hike by the Fed. However, the odds of a 100 basis point rate hike are off. 82%, which leaves the door open for a large movement due to the rigidity and the persistence of high inflation.

Meanwhile, the dollar index retreated from daily highs, down 0.51%, to 107.628, while US Treasury yields, led by the 10-year yield, which fell 4 basis points, falling below the threshold of the 3%.

What to watch out for

On Thursday, the Canadian docket will include May’s month-on-month manufacturing sales. In the United States, the initial applications for unemployment benefits, the inflation of producers and the spokesmen of the Fed will update the state of the battered US economy, with inflation above 9%.

Technical levels