The Bank of Canada is Expected to Raise Rates by 75 Basis Points
US Dollar Weekly Outlook
Even though there are some early indications that inflation is slowing down in the US, those signs won't assist much with the June statistics, which showed that the headline rate increased to 8.8 percent as expected. Although core inflation may be slightly lower on an annualized basis, the monthly change will still be much higher than Fed goals. We are slightly weaker than the consensus on industrial production and in line on retail sales, but neither report is expected to move the market.
Canadian Dollar Weekly Outlook
The Bank of Canada is expected to raise rates by 75 basis points in Canada as a result of increased inflation expectations, but this is also likely due to the fact that the resulting overnight rate of 2.25 percent won't be too high for the economy to bear. The risk of overdoing it increases as rates rise, so subsequent rate increases will probably be lower. The Bank will restate its belief that rates may need to be higher than 3 percent to accomplish the task, although we continue to advocate for a 3 percent peak. Expect the Bank to lower its growth projections, thereby admitting that bringing inflation back to goal will necessitate greater production sacrifices due to heavier price pressures than anticipated. Expect the report to delve into the inflation data to explain that a significant portion of this year's inflation shock isn't coming from Canada's excess demand and, as a result, how inflation might dissipate in the coming years without needing to push the nation into the severe recession that would be necessary if the spike was entirely the result of an economic overheating.
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