The US Dollar trims gains against its Canadian Counterpart on Wednesday. The pair is exploring session lows below 1.4030 on the early European morning session, down from Tuesday’s highs at the 1.4080 area.
The Greenback loses ground across the board on Wednesday as dovish remarks by Fed Chairman Jerome Powell cemented hopes for further rate cuts in October and December, sending trade war fears to the backseat.
Fed’s Powell hints at further rate cuts
Jerome Powell reiterated that the bank is slightly more concerned about the deterioration of the labour market than the inflationary risks, paving the path for further rate cuts in the next months.
Powell also affirmed that the end of the Fed is about to stop the balance sheet drawdown, the so-called “Quantitative Tightening” programme, as he assessed that liquidity conditions are gradually tightening
The Canadian Dollar’s recovery, on the other hand, remains frail, weighed down by the low price of Crude Oil, which is Canada’s main export. The US benchmark WTI Oil has bounced up from the five-month lows at $57.35 hit on Tuesday, but remains stalled near the $58.00 line on concerns that lower demand and progressive output hikes will lead to overproduction.
Interest rates FAQs
Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.
Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.
Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.
The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.
