Loonie would love a stronger CPI, but not the Bank of Canada – Forex News Preview
At its first meeting for 2023 on January 25 the BoC signaled the intention to pause after 425 bps of rate hikes in just 10 months. This makes sense as a period of stable monetary policy would allow the economy to absorb the higher rates giving the chance to the central bank to evaluate the overall impact. This viewpoint potentially applies to other developed economies, but only the BoC appears determined to adopt this strategy. Other central banks will potentially soon follow the BoC’s example if inflation rates continue to surprise on the downside. Therefore, this week’s releases will be the first true test of the BoC’s commitment to its "pause" strategy.
Inflation to ease further?The January headline CPI is seen rising by 6.1% on a year-on-year basis, down from the 6.3% increase seen in December. If confirmed, it will be the lowest print since March 2022 giving significant breathing space to Canadian households and potentially offering some early confirmation that the BoC strategy could be correct. However, when examining the January prints in other developed countries, there is a sizeable probability that the inflation figure could surprise on the upside. Should this be the case at Tuesday's release, we could see renewed expectations for a tighter monetary policy stance. The market is currently pricing in one 25 bps rate by the July meeting, compared to the almost three rate hikes seen by the US Fed during 2023.
![](https://www.xm.com/wp-content/uploads/2023/02/2023-Feb-20-FX-Preview-Eikon-chart-CAD-CPIAWEPMI-1.png)
One of the indicators expected to come to prominence going forward is the retail sales. Unquestionably, this dataset has been followed by market participants and central bankers, particularly considering the rising cost of living globally over the past two years. But it is now expected to rise to the top of the food chain as consumers, on the back of lower utility bills and renewed confidence, are expected to gradually return to their previous spending behaviour. Not only retail firms will benefit, but also the government coffers should enjoy the increased revenues. Government finances have been greatly affected by the continued financial support offered especially in the euro area.
![](https://www.xm.com/wp-content/uploads/2023/02/2023-Feb-20-FX-Preview-Eikon-chart-global-retail-sales-1.png)
Amidst this volatile environment, the loonie has been under severe pressure against the euro since August 25. The 13.7% rally in the euro/loonie pair paused at 1.4641 with loonie bulls managing to stage a decent recovery towards the 1.4370 area. Since the start of 2023 this pair has been trading inside a wide 1.4235-1.4641 rectangle. A similar pattern formed in the October 2021 – February 2022 period when, following two failed breakouts, the pair finally broke downwards and opened the door for the 10-year low of 1.2785 seen on August 25. Loonie bulls would enjoy retesting the 1.4263 area and, if overcoming it successfully, make a move towards the 1.4099 level.
![](https://www.xm.com/wp-content/uploads/2023/02/2023-Feb-20-FX-Preview-TA-chart-EURCAD-Daily-3-1024x547.png)
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