Dollar upside to remain intact on expected hawkish Fed cut
Dec 12 (Reuters) -The Canadian dollar’s reaction to the Bank of Canada’s widely expected 50bp cut provides an insight as to how the U.S. dollar might respond to the 25bp cut markets have discounted from the Federal Reserve at next week's meeting.
In other words, the bias leans towards dollar upside on the back of a hawkish cut from the Fed.
Despite the BoC cutting its key policy rate by 50bps, a slightly less dovish statement, signaling a more gradual approach to policy adjustments, led to a bounce in the Canadian dollar even though there were still reasons to expect further weakness in the loonie.
The dollar however, has no such problem should the Fed signal a slower pace of easing, which should see a dollar rally sustained.
Unlike Canada, U.S. growth data remains robust and as a result, the Atlanta Fed GDPNow model is tracking at 3.3%. Inflation indicators are also bottoming out at levels significantly above target. And the biggest difference is the threat of tariffs looms large for Canadian goods.
In any case, with Fed officials appearing to set the stage for a pause after a December cut, as well as the potential for another upgrade to the dot plots, particularly in the longer-run estimate, the balance of risks favors a hawkish Fed cut. This should keep the dollar in the ascendancy.
For more click on FXBUZ
US Inflation measures https://tmsnrt.rs/3Zznrnv
USD/CAD on BoC https://tmsnrt.rs/3Br71ph
(Justin McQueen is a Reuters market analyst. The views expressed are his own.)
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