Eyes on BoC interest rate decision and US GDP data

January 25, 2023 10:50

The Bank of Canada (BoC) interest rate decision will be in the spotlight later today, while investors and traders are eager to review the US Q4 2022 GDP preliminary report due to be published tomorrow.

The Australian Bureau of Statistics (ABS) announced that CPI inflation hit a 32-year record high in the fourth quarter of 2022, coming in at 7.8% on a year-to-year basis. Australia’s Treasurer Jim Chalmers said that inflation is unacceptably high.

In other news, Microsoft’s executives noted that sales rose just 2% in the fourth quarter of 2022, to $52.7bn. This has been the smallest quarterly increase since 2016.

Tesla (TSLA) is expected to release Q4 2022 and full-year 2022 financial results after the markets close. Tesla executives have reported that the company delivered 409,000 electric vehicles in the fourth quarter, which is a delivery record-high, but some market analysts suggest that the figure was below expectations.

Bank of Canada decides on interest rates 

Later in the day, the Bank of Canada will announce its decision on interest rates. A poll by Reuters revealed that economists forecast a 25 basis points interest rate hike. At its last meeting in December, the BoC’s governing council noted that, “we will be considering whether the policy interest rate needs to rise further to bring supply and demand back into balance and return inflation to target.” The surprising 50 basis points hike had traders believing that the BoC had ended its monetary policy tightening cycle, resulting in a Canadian dollar sell-off.

Last week, a Statistics Canada survey showed that headline inflation dropped to 6.3% on a year-to-year basis in December. The BoC’s plan is to bring CPI inflation down, close to its 2% set target. Analysts at ING suggest that, “the BoC is set to raise rates one last time on Wednesday with a 25bp hike, taking the overnight rate to 4.5%. Economic activity is slowing, and inflation is coming down and what is likely to be characterised as a pause for assessment is set to mark the peak for rates.”

In their report published on January 23rd, they also note that, “ultimately, barring a very dovish outcome (no hike and claiming that rates have peaked) or a very hawkish one (hike and signal more hikes), the impact on CAD may prove rather short-lived.”

US Durable Goods orders likely to have increased

On Thursday January 26th, the US Census Bureau will release its December Durable Goods Orders report. Market analysts forecast a 2.1% increase. November’s figure had come in at –2.1%, the sharpest fall recorded in the last 31 months.

Durable goods are goods planned to last for three years or more, such as vehicles and electric appliances. As producing these durable items may involve large investments, they are sensitive to the US economic situation. A high positive figure could strengthen the US dollar, while a negative one could weaken the country’s currency.

US GDP Q4 2022 preliminary data: Will the US dollar get a boost? 

The moment of truth will come on Thursday January 26th, when investors and traders will have the opportunity to scrutinise US GDP preliminary data. The Bureau of Economic Analysis (BEA) will publish its GDP Q4 2022 report which, according to some analysts, is expected to show that the US economy grew by 2.8% on an annualised basis.

In general, a high GDP growth rate or a better than expected figure boosts the US dollar’s value, while worse than anticipated sets of GDP data discourage traders and hurt the US currency. The US Federal Reserve (Fed) carefully monitors GDP growth and headline inflation rate as it moves forward with its monetary policy tightening cycle. Some economists suggest that the Fed will hike its benchmark interest rate by 25 basis points in its upcoming governing board meeting next week.

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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.

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