Daily Market Update

Dollar gains, but “Loonie” up on inflation

May 17, 2023

The United States Dollar starts off this morning’s session building on yesterday’s gains after US economic data came in stronger than expected, and several speakers from the Federal Reserve landed on the hawkish side of the spectrum.


Even as risk-off sentiment dominated globally, broad optimism inside the US placed the Buck at the top of the G10 board.

Debt-ceiling talks between the White House and congressional leaders, while intensifying yesterday, also appeared to show forward progress. Currently, negotiators are targeting a framework for President Joe Biden to review with House Speaker Kevin McCarthy upon Biden’s return from his G7 summit trip to Asia, which he has shortened to continue these negotiations.

Fed speakers also drove demand for USD as they left open the option for further rate hikes, prompting markets to decrease any odds of a rate cut later this year. Though the possibility of a recession no doubt still looms large in the minds of the regional Fed presidents, the central bank’s mandate to control inflation runs contrary to the continuing strong economic prints we’ve seen over the past few days. In the Fed’s view, it’s necessary to weaken the economy as a whole to bring US inflation back toward Jerome Powell’s 2 percent benchmark rate. Atlanta President Raphael Bostic, in particular, warned that “we haven’t gotten to the hard part yet,” when describing the pressure the central bank would face if tackling entrenched inflation does, in fact, come at the cost of this historically strong labor market.

Overall, dollar demand remains high as markets attempt to find clues as to the Fed’s path to June and beyond. Although a soft landing is not completely out of the question, it’s more likely than not that over the next few months, demand for USD will fade as the Fed and the federal government both attempt to stem inflationary pressures, whatever the toll this takes on the broader economic health of the nation.

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The single currency finds itself trading on the back foot today after Eurozone GDP was released yesterday in line with expectations, and this morning’s CPI data showed a slight downtick from last month’s record-high figure. Though this small decrease is unlikely to change the European Central Bank’s path in the near term and it may keep hiking rates through July, it does mean that the ECB may not need to raise after that and can then enter a holding pattern to assess the impact of its record hiking cycle.


The Loonie is faring better than the vast majority of its G10 peers and posted gains in other crosses overnight and into this morning. Yesterday Canadian inflation rates surprised to the upside, prompting a change in the market’s view of the Bank of Canada’s tightening cycle. Though the BoC held interest rates steady at its last two meetings, yesterday’s data showed its work is not yet done and inflation remains entrenched in the Canadian economy, upping the odds of a hike at its June meeting.

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