Canada's Unexpected Inflation Rise Reduces Rate Cut Hopes as Economy Faces Mixed Signals

Consumer prices in Canada unexpectedly rose in May, reversing a trend of steady cooling since the beginning of the year. This has reduced market expectations for a rate cut in July to below 50%. The Bank of Canada, which cut interest rates for the first time in four years, has stated that further rate cuts would depend on economic data.

In June, Canada's services economy contracted as new business declined, despite easing inflation pressures. Analysts attributed this to weak market demand. Simultaneously, Canadian manufacturing activity continued to decline in June, with the PMI remaining at 49.3 for the second consecutive month, marking the 14th straight month below the 50.0 threshold. New orders decreased slightly, and firms cut jobs for the first time in five months. However, cost pressures eased, with the input price index falling to its lowest level since January.

Meanwhile, Canada's unemployment rate rose to a 29-month high of 6.4% in June, with youth unemployment nearing a decade high outside of the pandemic years. Despite the increase in unemployment, wage growth accelerated to an annual rate of 5.6% in June.

Canada's GDP grew by 0.3% in April, driven by rebounds in wholesale trade, manufacturing, and other sectors. This matched market expectations and indicated a likely further expansion in May. The Bank of Canada's next rate announcement is on July 24, with another inflation reading and the June jobs report expected before then.

The U.S. dollar traded near two-week lows. Recent economic data indicating a cooling U.S. economy have heightened expectations of a rate cut, with a 73% chance of a cut in September, according to the CME FedWatch tool.

In June, the U.S. added 206,000 jobs, slightly below May's revised figure of 218,000, with the unemployment rate rising to 4.1%. The largest job gains were in education and health services, offsetting losses in retail trade and mining. Wage growth also slowed slightly.

The Federal Reserve reported that inflation has eased and the job market has returned to pre-pandemic conditions, with labor demand and supply balancing out. Despite inflation still being considered elevated at 2.6%, it is moving towards the Fed's target, possibly opening the door for interest rate cuts as soon as September.

Jerome Powell's upcoming testimony is expected to cover monetary policy and regulatory issues. The June inflation report, due on July 11, is expected to show a slight increase, with analysts predicting the Fed might start cutting rates in December, or possibly earlier if inflation data support it. Investors will also focus on weekly jobless claims and the U.S. Producer Price Index (PPI) report. As a result, the Canadian dollar might fluctuate within a broad range during this period and could weaken slightly due to the comparatively stronger economic situation in the United States over the medium term.

Data for Technical Analysis (1H) CFD USD/CAD

Resistance : 1.3645, 1.3647, 1.3652

Support : 1.3635, 1.3633, 1.3628

1H Outlook

Source: TradingView

Buy/Long 1 If the support at the price range 1.3625 - 1.3635 is touched, but the support at 1.3635 cannot be broken, the TP may be set around 1.3645 and the SL around 1.3620, or up to the risk appetite.

Buy/Long 2 If the resistance can be broken at the price range of 1.3645 - 1.3655, TP may be set around 1.3670 and SL around 1.3630, or up to the risk appetite.       

Sell/Short 1 If the resistance at the price range 1.3645 - 1.3655 is touched, but the resistance 1.3645 cannot be broken, the TP may be set around 1.3632 and the SL around 1.3660, or up to the risk appetite.

Sell/Short 2 If the support can be broken at the price range of 1.3625 - 1.3635, TP may be set around 1.3615 and SL around 1.3650, or up to the risk appetite.       

Pivot Points Jul 8, 2024 02:36AM GMT

Sources: Investing 1, Investing 2