USD/CAD bounces back following US data release

Key Movers

Investors are evaluating the monetary policy outlook as the DXY (dollar index) remains above 100. The most recent data indicates a strong demand for workers, with weekly claims dropping to a two-month low, but continuing claims have risen the most in over three months. Due to expectations of the Federal Reserve's final 25 bps rate hike this year, in response in easing inflation, the dollar has reached a low below 99.6, its weakest in over a year. This anticipated rate increase is expected to take place during the upcoming meet next week. The Philadelphia Fed Manufacturing Index in the United States showed minimal variation, declining slightly to -13.5 from -13.7 in June. This result was below market expectations, as analyst had predicted to a reaching of -10. The persistently negative index value indicates an ongoing decline in manufacturing activity.

The euro strengthened against the dollar, surpassing 1.12 during the trading session, achieving its highest value since February 2022. This growth is attributed to investor expectations that the European Central Bank will continue raising interest rates as a measure to address inflation and bring it closer to the target of 2 %. Within the Eurozone, inflation declined to 5.5% in June, the lowest in 17 months. However, the core inflation rate remained stubbornly high at 5.4%, still close to the record high of 5.7% observed in March. Currently, the interest rates in the Eurozone are at 3.5%. Recent weak economic data from various regions within the Eurozone may prompt the central bank to revise its inflation forecasts in September.

After a calm early European session, the pound reversed direction and fell to a new low below 1.2900 against the dollar. Data indicated a decrease in inflationary pressures in the UK has led to suggestions that the Bank of England might not need to raise interest rates as significantly as initially anticipated. The inflation rate eased to 7.9% in June, the lowest level since March 2022, and slightly below the market consensus of 8.2%, this reading aligns with the Bank of England's projection made in May. Moreover, the core inflation rate remained at 6.9%, which is not far from the previous periods’ 31-year high of 7.1%. Additionally, producer prices have declines more than expected.