Introduction
Statistics Canada is set to release consumer inflation figures for February, which will impact the Bank of Canada’s (BoC) Core CPI and the USD/CAD pair. The expected rise in the headline CPI and the projected deceleration of the yearly rate could impact the Canadian Dollar, particularly after the BoC paused its rate-hiking cycle earlier this month. This article will analyze the impact of Canada’s inflation figures on the BoC’s Core CPI and the USD/CAD pair amid a prevalent US Dollar selling bias.
Impact of Canada’s Inflation Figures on BoC’s Core CPI
Canada’s Core CPI, which excludes volatile food and energy prices, is estimated to rise by 0.8% in February, compared to 0.3% in January. This increase could be due to higher prices for items such as shelter, furniture, and appliances. However, on a yearly basis, the Core CPI is expected to ease to 4.6%, down from 5% in January. This is because of the higher base effect from last year, when the pandemic’s impact on the economy was felt more acutely.
The BoC closely monitors the Core CPI when setting its monetary policy, as it provides a better indication of underlying inflation trends. A softer domestic CPI print could impact the BoC’s monetary policy decisions, particularly after it paused its rate-hiking cycle earlier this month. If the Core CPI comes in lower than expected, it could signal that the BoC may hold off on further rate hikes or even consider a rate cut.
Impact of Canada’s Inflation Figures on the USD/CAD Pair
The USD/CAD pair is impacted by Canada’s inflation figures, particularly if they come in higher than expected. If the inflation figures come in above the forecasted 0.6% increase in the headline CPI, it could push the Canadian Dollar higher. This is because higher inflation may prompt the BoC to raise interest rates to cool down the economy and keep inflation in check. Higher interest rates can attract foreign investment and drive up the value of the Canadian Dollar.
Conversely, a softer CPI print could weigh on the Canadian Dollar and help the USD/CAD pair regain positive traction. This is particularly relevant in light of the BoC’s decision to pause its rate-hiking cycle. If the Core CPI comes in lower than expected, it may signal that the BoC is not as concerned about inflationary pressures as previously thought, which could put downward pressure on the Canadian Dollar.
Prevalent US Dollar Selling Bias
It’s worth noting that the USD/CAD pair’s upside may remain limited due to the prevalent US Dollar selling bias. This is because of the expectations that the Federal Reserve will soften its hawkish stance. The Federal Reserve has signaled that it may raise interest rates sooner than expected to curb inflation, which has driven up the value of the US Dollar. However, recent comments from Fed officials suggest that they may delay any rate hikes until later in the year, which could lead to a weaker US Dollar.
Conclusion
Canada’s inflation figures for February will impact the BoC’s Core CPI and the USD/CAD pair. A higher than expected Core CPI may prompt the BoC to consider further rate hikes, which could drive up the value of the Canadian Dollar. Conversely, a softer CPI print could weigh on the Canadian Dollar and help the USD/CAD pair regain positive traction. However, the prevalent US Dollar selling bias may limit the upside of the USD/CAD pair, despite any inflationary
