Spotlight on US CPI Report and BoC Rate Decision

The US CPI inflation report and the interest rate decision announcement by the Bank of Canada (BoC) will be in the spotlight of investors and traders for the rest of this week. The Federal Reserve (Fed) is expected to scrutinise the inflation report as it tries to combat elevated consumer prices, while the central bank of Canada is expected to reveal how it plans to move forward with the implementation of its monetary policy.

In line with analysts’ expectations, the Reserve Bank of New Zealand (RBNZ) kept interest rates unchanged, marking the first pause since October 2021. The RBNZ’s board meeting minutes said that inflation remains too high and noted that interest rates will need to remain at a restrictive level for the foreseeable future.

Reserve Bank of Australia (RBA) Governor Philip Lowe said that some further tightening may be required to return inflation to target and added that inflation’s complex picture has created significant uncertainties regarding its outlook. Lowe suggested that Australia’s economic growth is likely to be subdued over the next couple of years and mentioned that the full effect of monetary policy changes is yet to be felt.

US CPI Inflation Drops In June?

US CPI inflation data will draw investors' and traders' attention across global markets on Wednesday as the US economy acts as a benchmark for many other large economies. Market analysts suggest that consumer price inflation dropped to 3.1% in June, on a yearly basis but also increased by 0.3% on a month-to-month basis.  

The Fed has set a 2% headline inflation target but was forced to proceed with consecutive rate hikes when consumer prices spiralled out of control last year. A Reuters report quotes Commerzbank analysts who suggest that “the market might receive further reason to sell USD in the shape of the inflation data,” adding that headline and core inflation are likely to moderate. 

Bank of Canada Interest Rate Decision

Later today, the BoC will announce its decision on interest rates. Twenty of 24 economists surveyed by Reuters expect the BoC to lift rates by another 25 basis points and then hold well into 2024. If the forecast would be confirmed, it would be the second rate hike in a row after a brief pause by Canada’s central bank. Interest rate hikes currently stand at a 22-year high.

Inflation figures that take longer than expected to come down, a tight labour market and an expanding economy will likely force the BoC to consider further monetary policy tightening. A JP Morgan forecast agrees with the Reuters polls suggesting a quarter of a point rate hike could be expected.

Currency strategists at Monex Canada note in a report that “with the Bank of Canada placing a special emphasis on housing over the past few years, and specifically citing it as a reason for its hike in June, this is one reason out of many why officials will likely continue to signal greater concern about upside risks to inflation instead of downside risks to growth, even after they hit what we expect to be their terminal rate with a 25bp hike on Wednesday.”

UK GDP In May 2023

The Office for National Statistics (ONS) will publish May’s GDP data on Friday. Economists suggest that the UK’s GDP shrank by 0.3% in May, on a month-to-month basis. The UK economy has been subject to high inflation figures and a quite strong labour market that the BoE tries to tame by tightening its monetary policy.  

While the property market is cooling down due to very high interest rates related to mortgages, the latest average earnings report showed that workers are still able to find larger salaries that feed inflationary pressures.  

Does trading on macroeconomic news interest you? Learn how this approach works with our free webinars. Meet and interact with expert traders. Watch and learn from live trading sessions.

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.