Loonie rallies following the BoC’s interest rate hike

Key Movers

Demand for the US dollar dipped against all major currency pairs following positive inflationary news. In particular, USD printed a shocking yearly low against one of its major peers, the EUR. Inflation in the US decelerated more than expected, coming in at 3%, and down from 4% last month. The core CPI fell from 5.3% to 4.8%. On a monthly basis, the overall CPI basket went from 0.1% to 0.2%, below the expected 0.3%. The core went from 0.4% to 0.2%, declining US inflation will set the road ahead with a much clearer path for the Federal Reserve policymakers in the upcoming months.

The euro scrambled against the USD, climbing to its fresh yearly peak at the 1.1100 level. The European Central Bank (ECB) is expected to raise its benchmark policy rates by 25 bps at their policy meeting on July 27th. The current interest rate stands at 4% in the Eurozone. Another 25 bps hike will reinforce the ECB's hawkish stance as policymakers are in favor of further rate tightening if remains sticky. All in all, markets are betting on potential supplementary rate hikes by the ECB. Spain’s final inflation figures showed the CPI rose 1.9% in the year to June.

The GBP has swiftly regained all its losses against the US dollar amid the United States inflation data which has decelerated further. The GBP/USD pair has gathered enormous strength as unimpressive US inflation numbers may support a skip in the consecutive policy-tightening spree by the Fed. In the meantime, probabilities of a bulky interest rate hike from the Bank of England (BoE) have escalated and look imminent. Markets are currently predicting that the interest rates by the BoE may peak at the 6.25-6.50% levels.