– FOMC meeting could lead to market volatility.

– UK inflation surged in February.

– US dollar trading defensively, CAD underperforms.

USDCAD snapshot open 1.3700-04, overnight range 1.3697-1.3717, close 1.3713, WTI $69.13, Gold $1944.69

The Canadian dollar drifted aimless in a quiet overnight session as traders patiently await today’s FOMC decision.

There is a lot of anticipation around the Fed meeting with traders and analysts waiting to see how Chair Jerome Powell and his colleagues balance their inflation fight against the back drop of US banking uncertainty.

The immediate banking crisis has passed. The government prevented depositors from losing any money when Silicon Valley Bank (SVB) collapsed and pushed USD banking giants to come up with a plan to stave of the collapse of First Republic Bank (FRB).

However, there are over 4,800 commercial banks in the US, and it is rather likely that the other banks suffered the same bond stresses as FRB and SVB.

Many market participants believe the Fed will want to avoid increasing financial stress on the US banking system by halting rate hikes after today’s expected 25 bps bump. Traders are now pricing in rate cuts in the second-half of 2023.

At the same time, one half of the Fed’s mandate is price stability, and with US inflation at 6.0% in February, it is still 3 times higher than the target. It may be too soon for the Fed to abandon its inflation battle.

Canadian inflation continues to decline. The BoC measures of CPI-Core, Trim, Median and Common fell to 4.8%, 4.9% and 6.4% respectively in February. The battle has not been won, but inflation is in retreat.

Wall Street closed on a positive note yesterday and that set the stage for an equity rally overnight. The major Asian equity indexes closed robustly with Japan’s Nikkei 225 index gaining 1.93% and Australia’s ASX 200 index rising 0.87%.

European bourses opened positively but traded cautiously. The German Dax has risen 0.21% while the UK FTSE 100 index is unchanged, as traders await the Fed meeting. S&P 500 futures are close to unchanged.

The 10-year US Treasury yield has ticked higher to 3.623% from an overnight low of 3.57%.

EURUSD traded narrowly in a 1.0760-1.0794 with traders sidelined ahead of the FOMC meeting.

GBPUSD rallied from 1.2010to 1.2296 on the back of hotter than expected UK inflation.

USDJPY treaded water in a 132.26-132.93 band with prices underpinned by firmer US Treasury yields, although lingering safe-haven demand for yen is capping gains.

AUDUSD bounced in a 0.6663-0.6701 band, supported by a mildly improved risk tone.

There are no top-tier US or Canadian economic reports today.


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