– US CPI expected to have risen 7.3% y/y in January

– ECB lowers GDP and raises inflation forecasts

– US dollar opens on a mixed note

USDCAD Snapshot: Open 1.2672-76, Overnight Range-1.2667-1.2685, previous close 1.2673, WTI open $90.32, Gold open $1833.07

The Canadian dollar traded in a narrow range in an uneventful overnight session. Traders are hoping today’s US inflation data will breathe life into the market.

US CPI is expected to be at a 40 year peak of 7.3%y/y in December. While Core-CPI rises 5.9%. If so, some analysts believe it would be the catalyst for the Fed to hike rates by 0.50% at the March 16 meeting. Others do not believe that to be the case, suggesting the FOMC is too cautious.

Cleveland Fed President Loretta Mester is one of the cautious FOMC members. Yesterday she said, “I don’t think there’s any compelling case to start with a 50-basis-point” rate increase.”

The US interest rate outlook as been the catalyst behind the surge in the US dollar since the January 26 FOMC meeting. Fed Chair Powell’s admission that inflation was “higher than expected” fueled speculation of aggressive rate hikes beginning in March and that view is reflected in current exchange rates.

However, if January CPI rises sharply above the 7.3% y/y forecast, calls for a 0.50% hike at the March FOMC meeting will be deafening. The Canadian dollar will weaken with USDCAD possibly testing the 1.3000 area.

If the result is “as forecast” it may see a knee-jerk sell-off on Wall Street, which would also boost USDCAD, but the move shouldn’t last as it is reflected in current prices.

The Canadian dollar continue to be supported by steady to firm oil prices. WTI retreated from the Feb 4 peak of $93.05/b, found support in the $88.40/b area, and have climbed to $90.42/b today. The EIA reported US crude inventories declined 4.75 million barrels, which weighed on prices, but the news is overshadowed by geopolitical tensions and hopes for a surge in oil demand in the coming months.

EURUSD traded defensively in a 1.1414-1.1446 range, pressured by the ECB’s downward revisions to growth forecasts. The ECB predicts GDP will be 4.0% in 2022 compared to their 4.3% y/y forecast in November. They expect inflation to rise to 3.5% y/y (November forecast 2.2%).

GBPUSD traded firmer, rising from 1.3528 to 1.3579, despite comments by BoE Chief Economist Pill cautioning against an “aggressive” approach to rates. He recommends raising rates gradually.

US weekly jobless claims are expected to fall 8,000 to 230,000.

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