FOMC spook markets with dim outlook

BOC keeps interest rates unchanged, dollar under pressure

By Nadia Elbilassy | @Nadia Elbilassy | 13 April 2023

Midday Market update
  • Inflation figures dominate sentiment but gold prices stay resilient

  • FOMC indicates banking sector crisis could potentially lead the economy into a recession this year

  • The Bank of Canada keeps interest rates unchanged

The Bank of Canada keeps interest rates unchanged

The Bank of Canada chose to maintain the interest rate at 4.50%, which was expected by the market. The decision was made for the second consecutive time.

Tiff Macklem, the Governor of the Bank of Canada, expressed concern about persistent inflation levels that are above the target range. He stated that this raises the risk of further inflation and suggests that interest rates may need to be kept low for a longer duration. The governor also emphasized that the bank is prepared to raise interest rates if required to bring inflation back to its target level.

Following the press conference, the Canadian dollar experienced minor gains compared to most currencies. Meanwhile, the US dollar recorded a slight drop against its Canadian counterpart and traded close to 1.3436 levels during today's trading session.

Dollar under pressure after lower inflation figures

The US dollar index experienced a significant drop against most major currencies after the release of the US Consumer Price Index (CPI) data and the Federal Reserve meeting minutes that were issued yesterday. The minutes indicated that the recent banking sector crisis could potentially lead the world's largest economy into a recession this year.

Figuratively CPI data released yesterday, showed a decline in the annual inflation rate, dropping from 6.0% to 5.0%. However, the core index, which excludes food and energy, rose from 5.5% to 5.6% during the same period.

Although inflation remains much higher than the Federal Reserve's target of 2%, there are indications that it has been gradually decreasing over the last few months. strengthening the belief in the market that the Federal Reserve's monetary tightening cycle, implemented since last year to combat high inflation rates, may be coming to an end.

FOMC overnight statements

The US dollar suffered further losses as Federal Reserve members made statements that hinted at a possible end to interest rate hikes. Patrick Harker, a Federal Reserve member in Philadelphia, suggested that the end may be near, while Neel Kashkari, another member, indicated that a recession is likely to occur this year.

Following yesterday's significant drop in the US dollar index, the index saw a small increase at the start of today's trading session and was trading near 101.55 points. However, the lower-than-expected inflation data has increased expectations that the Federal Reserve may raise interest rates again next month before slowing down its monetary tightening efforts.

Meanwhile, the precious metal's value continued to increase for the third consecutive session due to the decline of the US dollar index. Gold traded at $2026 per ounce.