Loonie falls against US dollar due to gloomy small businesses outlook
Thursday 28 July, 2022
Daily Currency UpdateOn the economic side, Canada's Small Business Optimism index fell to 52.7 in July from 59.4 in June. The most critical news, though, came from the Fed in the US. Fed Chairman Jay Powell confirmed that the new 2.5% Fed Funds rate is close to neutral (which means no restrictive and expansionist monetary policy). He mentioned that the degree and pace of future rate hikes are not predetermined. He also commented that a narrow path to a soft landing still exists, but that the Fed will act depending on economic data. The financial markets reacted positively because of the assumption that the Fed won't have significant Fed fund rate hikes over the near future. However, the Fed needs to see signs of inflation moving lower to stop moving Fed fund rates higher. This morning, economic releases showed that the US GDP QoQ contracted by -0.9% versus an expected positive number of +0.4%, which significantly increases the risk that the US economy will fall into recession by year-end. The US dollar erased some of its losses this morning.
Key MoversThe main drivers for the Pound’s recent rally are external, as there has been little domestic data from the UK this week. The next big event from the UK is August 4th's interest rate decision from the Bank of England, where we could see a 50bp interest rate hike, which was announced by BoE Governor Andrew Bailey. The Bank has never raised rates by more than 25bp since it gained independence from the government in the late nineties, so this would be unprecedented. President Biden in the US said he is "not surprised' about the US economy slowing. He added "coming off of last year's historic economic growth – and regaining all the private sector jobs lost during the pandemic crisis – it's no surprise that the economy is slowing down as the Federal Reserve acts to bring down inflation."
- EUR/CAD: 1.2970 - 1.3103 ▼
- GBP/CAD: 1.5509 - 1.5620 ▼
- AUD/CAD: 1.1139 - 1.1220 ▼
- USD/CAD: 1.2800 - 1.2893 ▲