Daily Currency Update

USD - US Dollar

The absence of significant data releases leading up to the Federal Reserve's June meeting has resulted in minimal changes in pricing. Currently, there is a 20-25% implied probability of an interest rate increase following the release of weak ISM services figures on Monday. Despite this and the overall positive conditions for stock markets, there hasn't been any substantial correction in the value of the dollar. The prevailing sentiment in the market remains pessimistic towards European currencies, while the dollar's resilience likely indicates hesitance to take on positions betting against the dollar prior to the US CPI risk event on June 13th. This event is still perceived as having the potential to influence the decision towards a rate hike on the following day. With no other significant market-moving events today, a potential rate hike by the Bank of Canada could end up providing support for the US dollar.

CAD - Canadian Dollar

The Bank of Canada took a more dovish stance compared to other central banks and has maintained interest rates at the same level since January. However, persistent inflation, a very tight labor market, and a relatively positive growth outlook are making a case for a shift towards monetary tightening. The market is indicating a 45% probability of a 25 basis points rate increase happening today. Although it is a close decision, we believe it is more likely that the Bank of Canada will maintain a hawkish stance, exercising caution while evaluating the delayed effects of previous tightening measures. We still anticipate a return to 2% inflation in Canada during the early months of 2024, aided by softer commodity prices. If the Bank of Canada holds rates steady again, we expect them to convey a hawkish tone. Market expectations currently incorporate a 40 basis points tightening by the end of summer, and we believe policymakers are unlikely to push back or significantly disappoint the market's hawkish outlook given recent data. Therefore, as long as the hold decision includes indications of potential future tightening, we anticipate any negative impact on the Canadian Dollar to be short-lived, and we continue to favor the Canadian Dollar over other currencies in the current risk environment. Observe the USD/CAD trends.

EUR - Euro

The euro continues to suffer from a softening inflation story in the eurozone. Yesterday, April’s report on consumer expectations showed a considerable drop. While easing inflation should build a case for the doves, ECB communication has not seen drastic changes as we head into next week’s policy announcement. Yesterday, President Christine Lagarde reiterated her call for more tightening, and her hawkish tone is probably a key factor keeping markets attached to the 40-45bp pricing for the July meeting. We have other speakers to keep an eye on today. Barring major dovish remarks we feel EUR/USD can remain anchored to 1.0700 for now.