ATFX Forex Market: Bank of Canada cuts interest rates for the second time this year, Macklem doesn't want the economy to weaken excessively

ATFX Forex Market: The Bank of Canada announced the results of its July interest rate decision, cutting rates by 25 basis points to 4.5%. This marks the Bank of Canada's second rate cut this year, following a similar 25-basis-point reduction on June 5. During the monetary policy press conference, Bank of Canada Governor Tiff Macklem stated, "We do not want the economy to weaken excessively, causing inflation to fall below our 2% target," indicating heightened concerns over the negative impacts of high interest rates. The Bank of Canada's next rate decision is scheduled for September 5, and if inflation data continues to underperform, a third rate cut cannot be ruled out.

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In April this year, Canada's core CPI annual rate dropped to 1.6%, hitting its lowest level since April 2021. While CPI data rebounded in May and June, it peaked at just 1.9%, still below the 2% moderate inflation benchmark, highlighting the persistent dampening effect of high interest rates on price growth. Maintaining inflation around 2% remains a primary policy goal for central banks globally. Comparatively, the U.S. core CPI annual rate stands at 3.3%, the Eurozone at 2.9%, and the UK at 3.5%, all above target levels. Financial markets currently anticipate rate cuts from the Federal Reserve, European Central Bank, and Bank of England, though these expectations are far weaker compared to the Bank of Canada's potential second and third cuts. From a monetary logic perspective, central banks entering a rate-cutting cycle will significantly impact their domestic currencies.

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USDCAD is currently quoted at 1.3816, up 4.87% (642 pips) year-to-date from its low of 1.3174 on December 27, 2023. Despite strong market expectations for the Federal Reserve's first rate cut this year, the U.S. dollar index has strengthened against the trend, driven by robust U.S. CPI and nonfarm payroll data, which have repeatedly delayed the Fed's anticipated rate cut. Markets now expect the Fed to initiate its first cut in September, but if August economic data remains strong, further delays are likely. Some analysts argue that the strong nonfarm payroll growth is largely due to increased immigration, making the unemployment rate a more accurate indicator of domestic employment conditions.

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In July 2023, the U.S. unemployment rate hit a cyclical low of 3.5% before rising steadily to 4.1% in June this year, the highest since December 2021. While a sub-5% unemployment rate is considered healthy, the upward trend has raised market concerns. If next week's nonfarm payroll report shows another increase in unemployment, expectations for a Fed rate cut will intensify, potentially halting USDCAD's upward momentum.

Technical Analysis:

USDCAD Resistance: 1.3846 (under test)

USDCAD Current Price: 1.3816

USDCAD Support: 1.3589 (distant)

July 25 Economic Calendar:

UK: July CBI Industrial Order Expectations, released at 18:00 GMT, previous -18, forecast -20.

U.S.: Initial Jobless Claims (week ending July 20), released at 20:30 GMT, previous 243K, forecast 238K. Q2 GDP Annualized (preliminary), released simultaneously, previous 1.4%, forecast 2%.

Natural Gas: EIA Weekly Storage (week ending July 19), released at 22:30 GMT, previous 10B cubic feet, forecast 13B cubic feet.

ATFX Risk Disclaimer: Trading carries risks. The above content represents the analyst's personal views and does not constitute investment advice. Do not rely solely on this report. Analyst views may change over time without notice.