USD/CAD trades volatile, after an unexpected BoC 1% rate hike, and US inflation above 9%

• The USD/CAD trades within a 120 pip range, courtesy of tier 1 data from both countries.
• The Bank of Canada (BoC) hiked rates by 100 bps and will keep tightening further.
• June’s US Consumer Price Index (CPI) rose by 9.1% YoY, the highest in 40 years.
• STIRs money market futures odds of the Federal Reserve hiking 100 bps increased to 82%.

The USD/CAD slumps after the Bank of Canada (BoC) delivered an unexpected rate hike of 100 bps in the ira July meeting, lifting rates to 2.50% vs. 2.25% estimated by market participants, and following a hot US inflation reading topping the 9%.

The USD/CAD is trading at 1.2958 at the time of writing on Wednesday, with the pair seesawing in a volatile trading session, reaching a daily low/high around 1.2945-1.3060 range, an area where the major would keep trading unless a fresh catalysts break the range.

The USD/CAD is trading volatile due to a surprise 1% rate hike by the BoC and US inflation above 9%

In its monetary policy statement, the Bank of Canada said that the Governing Council (GC) decided to front-load interest rates and emphasized that rates will need to rise further. The BoC stated that inflation is expected to persist at around 8% in the few months and has further broadened, with more than half of the components of CPI, rising more than 5%. Although the war in Ukraine and supply chain disruptions are to blame, domestic price pressures from excess demand are becoming more prominent. The BoC also acknowledged that the labor market is tight and increasing wage pressures would keep inflation high.

Regarding economic growth, the Bank expects the economy to grow by 3.5% in 2022, while for Q2, it estimates a 4% growth and a downtick in Q3 to 2%.

In the meantime, earlier in the day, US inflation topped the charts rising by 9.1% YoY, at a fresh 4-decade high, as shown by the US Labor Department, which also revealed the so-called core CPI, which excludes volatile items like food and energy at 5.9%, lower than in May, but higher than estimated. Concerning the higher inflation reading, STIRs money market futures have fully priced a 75 bps rate hike by the Fed. However, the odds of a 100 bps rate raise are 82%, leaving the door open for a jumbo move due to the stickiness and persistently high inflation.

in the meantime, the US Dollar Index retreated from daily highs, down 0.51%, at 107.628, while US Treasury yields, led by the US 10-year yield down 4 bps, sitting below the 3% threshold.

What to watch

On Thursday, the Canadian docket will feature Manufacturing Sales MoM for May. On the US front, Initial Jobless Claims, inflation on the producer side, and Fed speakers would update the status of a battered US economy, with inflation above 9%.

USD/CAD Key Technical Levels