USD/CAD declines ahead of FOMC minutes

During the North American day, the Canadian dollar is trading quietly, with the USD/CAD exchange rate currently down 0.07% at 1.3517. In the hopes of learning more about the Fed’s potential future interest rate path, investors are eagerly awaiting the release of the FOMC January meeting minutes later today.

After the Fed hinted in December that it might lower rates, markets had already factored in a drop in March. These expectations have been drastically reduced, though, as the Fed has resisted calls for a March cut.

Canada’s inflation rate dropped to its lowest level since June 2023, but the Canadian dollar showed little interest. Headline CPI declined to 2.9% y/y in January, down from 3.4% in December and below the market estimate of 3.3%.

This marks the first time that inflation has fallen within the Bank of Canada’s target range of 1%-3% since June 2023. The main drivers of the decline in the headline reading were sharp drops in the price of fuel and food.

Core inflation, which excludes fuel and food, showed a modest decline in January. The average of two of the Bank of Canada’s core measures of inflation came in at 3.35% in January, below the December gain of 3.6%. The decline in inflation is an encouraging sign for the Bank of Canada, but both the headline and core readings are well above the BoC’s goal of 2% inflation, which is the midpoint of the target range.

USD/CAD briefly tested a fresh high for the week, but the pair continues to churn in near-term consolidation levels as markets buckle down for the latest meeting Minutes from the Fed’s Federal Open Market Committee (FOMC).

Market momentum remains thin with US Purchasing Managers Index (PMI) figures due on Thursday, and the trading week will wrap up with the Fed’s latest Monetary Policy Report on Friday.