BoC Divided on Inflation Risks as Markets Expect Further Cuts Amid Economic Uncertainty

The BoC has reduced its key interest rate three times this year, bringing it to 4.25%. Markets anticipate another 50 basis point cut in October and a smaller one in December. The central bank has been transparent about its decision-making process, especially in light of public dissatisfaction over rising interest rates and inflation.

The minutes of the BoC’s September 4 meeting revealed that council members were divided over inflation risks. Some viewed the economy as balanced, with inflationary pressures in housing and services countered by a slowing economy and rising unemployment. Others were more concerned about potential inflation decreases if the economy and labor market weakened further. The bank has been cutting rates since June, following a drop in consumer prices, which reached the BoC’s 2% target in August.

Canada’s inflation rate fell to 2% in August, the lowest since February 2021, driven by declines in gasoline, telecom services, and clothing prices. Retail sales also saw growth in July, led by the automotive sector, which provided positive news for the economy despite concerns about future discretionary spending. However, housing starts dropped significantly in August, reflecting a slowing real estate market.

BoC Governor Tiff Macklem discussed how the adoption of artificial intelligence (AI) by businesses could temporarily increase demand, potentially raising inflation. He also mentioned the BoC's cautious use of AI to improve its economic forecasts. Macklem highlighted that while AI's effects are uncertain, it hasn’t yet led to a decrease in employment, and its long-term impact on inflation remains difficult to predict.

The U.S. dollar stabilized on Tuesday after previous losses and held steady near a 12-month low, following last week’s selloff driven by the Federal Reserve’s 50 basis-point rate cut. Traders are now speculating about further rate reductions, with a 53% chance of another half-point cut at the Fed’s November meeting. Markets are also awaiting key inflation data later in the week to assess future Fed actions.

U.S. consumer confidence fell sharply in September, its biggest drop in three years, largely due to concerns over the labor market. Despite these worries, households still planned to make major purchases like homes in the coming months, which could support consumer spending. The Fed's recent rate cut aims to sustain low unemployment, currently at 4.2%, ahead of the November presidential election.

U.S. home prices saw a slight increase in July, though the overall upward trend is slowing. As mortgage rates decline and supply improves, housing affordability may rise, although significant price drops remain unlikely due to ongoing demand.

The Federal Reserve’s aggressive rate cut has reassured investors that the central bank will take decisive action if the economy weakens. UBS suggests this move could signal further rate cuts if labor market data deteriorates, with the focus shifting to how low rates will eventually go.

UBS anticipates a soft landing for the economy, with growth estimates for Q3 at around 2.5%-3%. While a “Roaring ‘20s” scenario of stronger growth and inflation is possible, uncertainties remain, particularly regarding the long-term path of interest rates and fiscal policy after the election. Volatility may resurface as investors seek more clarity on the economy's future trajectory.

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

Resistance : 1.3431, 1.3434, 1.3439

Support : 1.3423, 1.3420, 1.3415

1H Outlook

Source: TradingView

Buy/Long 1 If the support at the price range 1.3415 - 1.3423 is touched, but the support at 1.3423 cannot be broken, the TP may be set around 1.3434 and the SL around 1.3411, or up to the risk appetite.

Buy/Long 2 If the resistance can be broken at the price range of 1.3431 - 1.3439, TP may be set around 1.3445 and SL around 1.3419, or up to the risk appetite.       

Sell/Short 1 If the resistance at the price range 1.3431 - 1.3439 is touched, but the resistance 1.3431 cannot be broken, the TP may be set around 1.3422 and the SL around 1.3443, or up to the risk appetite.

Sell/Short 2 If the support can be broken at the price range of 1.3415 - 1.3423, TP may be set around 1.3410 and SL around 1.3435, or up to the risk appetite.       

Pivot Points Sep 25, 2024 02:40AM GMT