The latest global inflation data have come and gone, overall making the outlook on global interest rates a little bit cloudier.
Here’s a quick recap of this week’s inflation data and what it may mean for each currency in the short-term!
Canadian CPI reading for March 2023
- Consumer Price Index m/m: 0.5% actual (0.3% forecast) vs. 0.4% in February
- Core Consumer Price Index m/m: 0.5% actual (0.3% forecast) vs. 0.4% in February
- Consumer Price Index y/y: 4.3% actual (4.1% forecast) vs. 5.2% in February
- Core Consumer Price Index y/y: 4.3% actual (4.3% forecast) vs. 4.7% in February
The Bank of Canada (BOC) should find this round of data encouraging because it shows that the sharp rise in interest rates is having the desired effect in the most rate-sensitive parts of the economy.
In March 2023, Canada recorded its first annual inflation print below 5% since 2021 and the softest positive rate in CPI since August 2021. But it’s not likely that the Canadian economy has fully felt the effects of last year’s rate rises yet, and if further economic deterioration into 2023 does come, that should aid in bringing prices down.
For now this should limit speculation that the BOC needs to tighten monetary policy further, and this data trend even opens up the slight possibility of rate cuts down the road if economic weakness is more than anticipated.
This idea may have been a large influence as to why the Loonie has been broadly weaker against the majors since the data release after the initial pop higher, as seen in the chart. And it may continue to have some weight on the Loonie until we get fresh Canadian inflation updates.
U.K. CPI readings for March 2023
- Consumer Price Index m/m: 0.8% actual (0.3% forecast) vs. 1.1% in February
- Core Consumer Price Index m/m: 0.5% actual (0.3% forecast) vs. 0.4% in February
- Consumer Price Index y/y: 10.1% actual (10.2% forecast) vs. 10.4% in February
- Core Consumer Price Index y/y: 6.2% actual (6.0% forecast) vs. 6.2% in February
Overlay of GBP Pairs: 15-Minute Forex Chart
Based on the bullish reaction in Sterling after the release of U.K. inflation updates, it looks the strong better-than-expected monthly CPI numbers caught many traders off guard.
The quick pop higher in the British pound against the majors suggests that expectations have shifted on what the Bank of England (BOE) may do in their May and June monetary policy meetings. Some analysts now see a possibility of the terminal rate reaching 4.75% by the Summer, 50 bps higher than the current rate at 4.25%.
We did see a pullback in Sterling’s rally during the U.S. trading session, possibly profit taking ahead of what could be another volatile GBP event with the upcoming U.K. flash PMI data on Friday.
But overall, this idea is supportive of the British pound in the short-to-medium term as it may lead to hawkish rhetoric from the Bank of England over the coming weeks.
New Zealand CPI readings for Q1 2023
- Consumer Price Index q/q: 1.2% actual (1.6% forecast) vs. 1.4% in Q4 2022
- Consumer Price Index y/y: 6.7% actual (7.0% forecast) vs. 7.2% in Q4 2022
Consumer prices in New Zealand rose slower than markets had expected in Q1 2023. A closer look showed that softer fuel prices helped, though prices of key goods like food, housing, and utilities remain elevated.
While still way above the Reserve Bank of New Zealand’s (RBNZ) 1% to 3% target range, today’s CPI releases opens up the idea that RBNZ may begin to track its peers and pause its interest rate hikes.
The prospect of a rate hike pause in RBNZ’s May 24 meeting, combined with a lack of other catalysts during Asian session trading, sent NZD sharply lower against its major counterparts.
Takeaways on Global Inflation
Consumer prices in both Canada and New Zealand slowed down much faster than markets had priced in this week. Not surprising since the BOC and RBNZ are some of the first central banks to start their rate hike cycles.
On the other hand, persistently high energy prices in the U.K. are leaving the door open for the BOE to further raise its interest rates.
So, while not all major central banks can participate in rate hike pause or pivot talks just yet, markets may start to price in “peak inflation” scenarios for some countries.
This means keeping our eyes on the differences of inflation conditions may likely continue to be a strong leading fundamental signal to traders, potentially pushing traders to buy high inflation country’s currencies while selling those with further signs of decelerating rates. Until this dynamic changes, this could help traders anticipate price action, especially for medium-to-longer term trading ideas.
This post first appeared on babypips.com
