Forex Market Review (European Session) – Canadian dollar outperforms on rate hike probability; dollar steady ahead of Fed

Forex Market Review (European Session) – Canadian dollar outperforms on rate hike probability; dollar steady ahead of Fed

The Canadian dollar was one of the top performing major currencies after gaining on hawkish comments from a Bank of Canada official. The pound remained soft while the dollar index was little changed before Wednesday’s Federal Reserve policy decision.

Bank of Canada Senior Deputy Governor Carolyn Wilkins’ comments yesterday raised the probability of a rate hike by year-end. Wilkins said the central bank would assess if it needs to keep interest rates at near-record lows as the Canadian economy grows. The loonie rallied sharply in reaction to her comments, with the USD/CAD pair dropping to an eight-week low of $1.3273 and resulting in a break of the 100-day and 200-day moving averages.

The pound remained below the key $1.2700 level it had fallen under on Monday, trading mostly flat around $1.2660 during the Asian session. On Friday, cable fell to $1.2634, the lowest since May 18. Focus turns to UK CPI data due later today. Meanwhile, investors will also closely watch the Bank of England meeting on Thursday, at which the benchmark rate is expected to remain at 0.25%.

The euro retreated against the dollar to trade below the key $1.1200 level. German ZEW data are due later today.

The dollar edged higher against the yen to rise above 110 yen ahead of a widely expected interest rate rise by the Fed tomorrow. The FOMC begins its two-day policy meeting today. The dollar index, which tracks the greenback against a basket of trade-weighted currencies, was little changed in Asian trading but remained above the 97 level after rising yesterday.

The Fed is expected to announce tomorrow that it will raise the Fed funds rate for the second time this year, to a target range of 1.00 to 1.25%. But investors will be mostly looking to see if the US central bank will also provide more detail on its plans to shrink its huge balance sheet. Meanwhile, US PPI data are due later today.

The aussie fell after the NAB Business survey out of Australia today, which saw a drop from April. The index fell 6 points to +7 in May, but it is still higher than the long run average and shows that the business sector is still looking upbeat. Business conditions are still high at +12 index points. The aussie slid after the data to reach a low of $0.7538 after hitting an earlier high of $0.7564.

Gold was little changed and mostly traded around $1,265.50 an ounce, after four straight days of losses. The precious metal was weighed by market expectations of a Fed rate hike this week.

Oil prices rebounded after sliding yesterday, with WTI crude edging up to a high of $46.35 a barrel. This was mainly a reaction to news that Saudi Arabia, a major oil exporter, would make significant supply cuts to customers such as the US and Asia. Meanwhile, focus will be on API data due later today that are forecast to show crude inventories declined after an unexpected rise shown in the previous report.

Source: Trade Forex with XM.

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