Canadian Economy Rebounds, Raising Possibility of July Interest Rate Hike

Canada's economy showed a rebound in May after a stall in April, which has increased the possibility of the Bank of Canada raising interest rates in July. The economy remained unchanged in April. However, a 0.4% growth in real gross domestic product is expected in May.

Despite a record-pace monetary tightening cycle, the economy is maintaining stronger performance than anticipated. The Bank of Canada raised its key interest rate to 4.75% in June to address concerns about persistent inflation above the 2% target.

However, the mining, quarrying, and oil and gas extraction sector, as well as the utilities sector, are projected to decline in May. April saw growth in the mining sector, offsetting declines in other goods subsectors. Public administration, wholesale trade, finance, and insurance also contributed to the softness in the services sector.

While immigration continues to support the economy, other factors like savings, government spending, and mortgage amortizations are expected to fade in the coming years, leading to higher interest rates during this period. The Bank of Canada estimates that it takes between six and eight quarters for rate hikes to have an impact.

Recent data showed a decrease in Canadian inflation, but underlying price pressures remain strong, potentially surpassing the Bank of Canada's growth projection for the second quarter. The annual inflation rate in Canada slowed to 3.4% in May.

Businesses in Canada still anticipate high inflation rates to remain above the 2% target until at least 2025, although labor market and wage pressures are expected to ease. Hiring expectations have decreased compared to the previous quarter, but businesses anticipate a less intense labor shortage. Input costs and selling prices are expected to decline.

The business survey also indicates a reduced expectation of a recession in the next year compared to the previous quarter. Wage growth expectations have also moderated. More firms now believe it will take five years or more for inflation to reach the Bank of Canada's target. Consequently, analysts have adjusted their forecasts, predicting a slowdown later in 2023 or 2024 with higher-than-anticipated interest rates.

In the US, economic data showing a cooling in consumer spending raised doubts about the Federal Reserve's aggressive approach to fighting inflation. The dollar index declined after two consecutive days of gains.  

The nonfarm payrolls report and the minutes of the Federal Reserve's June meeting are anticipated as significant events during a shortened week. Despite an uptick in the unemployment rate, signs of strength in the labor market have bolstered the belief that the US economy can avoid a severe recession despite the Fed's tightening. The labor market is expected to play a crucial role in market and monetary policy outcomes.

The Federal Reserve will publish the minutes of its June meeting, providing further insights into the ongoing debate over policy tightening. A gauge of inflation closely followed by the Federal Reserve suggests a cooling of price pressures, raising hopes of the end of the rate-hiking cycle. Fed Chair Jerome Powell has indicated that at least two more interest rate hikes are expected this year.

Overall, the CAD is expected to have a mixed trend with some upward pressure due to the possibility of interest rate hikes and the better-than-expected economic performance, but also some downward pressure from sectoral declines and yield spreads between the US dollar pairs.

Data for Technical Analysis (5H) CFD USD/CAD

Resistance : 1.3258, 1.3263, 1.3269

Support : 1.3246, 1.3241, 1.3235           

5H Outlook

Source: Investing.com

Buy/Long 1 If the support at the price range 1.3241 - 1.3246 is touched, but the support at 1.3246 cannot be broken, the TP may be set around 1.3263 and the SL around 1.3236, or up to the risk appetite.

Buy/Long 2 If the resistance can be broken at the price range of 1.3258 - 1.3263, TP may be set around 1.3270 and SL around 1.3241, or up to the risk appetite.       

Sell/Short 1 If the resistance at the price range 1.3258 - 1.3263 is touched, but the resistance 1.3258 cannot be broken, the TP may be set around 1.3246 and the SL around 1.3268, or up to the risk appetite.

Sell/Short 2 If the support can be broken at the price range of 1.3241 - 1.3246, TP may be set around 1.3235 and SL around 1.3263, or up to the risk appetite.       

Pivot Points Jul 03, 2023 02:35AM GMT

Sources: Investing 1, Investing 2