Bank of Canada signals possible rate cuts as US dollar gains strength amid economic and inflation concerns
The US dollar rose against major global currencies on Friday, including the euro, British pound, and commodity-linked currency such as the Canadian dollar.
Reuters reported that investors consolidated positions ahead of the weekend, anticipating further inflation data and monitoring potential trade developments.
According to Karl Schamotta, chief market strategist at Corpay in Toronto, the greenback experienced a “technical rebound” after weeks of sustained selling, while renewed trade concerns added risk discounts to other currencies.
However, the dollar pared gains after S&P Global data showed US business activity dropping to a 17-month low. Additional declines followed weaker-than-expected US consumer sentiment and existing home sales data.
The reports reinforced expectations that the Federal Reserve will cut interest rates this year, though policymakers are expected to maintain current levels for several months.
US rate futures on Friday reflected expectations of 44 basis points (bps) in easing this year, compared to 38 bps on Thursday, according to LSEG calculations.
The Federal Reserve is expected to consider resuming rate cuts in either September or October.
Markets are now turning their focus to the upcoming Personal Consumption Expenditures (PCE) index, the Fed’s preferred inflation gauge, scheduled for release next week.
The Canadian dollar weakened against the US dollar, falling 0.4 percent to 1.4230, or 70.27 US cents. It fluctuated within a range of 1.4169 to 1.4235 during the session and ended the week down 0.3 percent.
The decline came as the Bank of Canada (BoC) provided clearer indications that it could cut interest rates to support the economy if a trade war escalates.
BoC Governor Tiff Macklem stated that the central bank's 2 percent inflation target should be maintained in its upcoming 2026 review while considering risks such as potential US tariffs.
According to Reuters, he noted that if tariffs do not have a substantial inflationary impact, monetary policy could help sustain demand and prevent an excessive economic downturn.
Royce Mendes, managing director and head of macro strategy at Desjardins, commented that Macklem has become “clearer” about the BoC’s likely response to US tariffs.
Previously, the central bank had been non-committal, but now it is signaling that it would likely cut rates more aggressively if a trade conflict emerges.
Following Macklem’s remarks, investor expectations for a BoC rate cut in March increased to 43 percent, up from 33 percent.
Meanwhile, the US dollar recovered some losses against a basket of major currencies, while oil prices, a key driver of the Canadian economy, fell 2.9 percent to US$70.40 per barrel.
In Canada, retail sales increased by 2.5 percent in December due to a sales tax holiday that boosted food and beverage spending. However, preliminary estimates indicate a 0.4 percent decline in January.
Canadian bond yields declined, with the 10-year yield falling 11.7 basis points to 3.094 percent.
US stock markets fell sharply on Friday as US economic data signaled slowing growth and persistent inflation concerns, prompting investors to shift toward safer assets.
CNBC reported that the Dow Jones Industrial Average lost 748.63 points, or 1.69 percent, closing at 43,428.02.
Over two days, the Dow dropped roughly 1,200 points. The S&P 500 declined 1.71 percent to 6,013.13, while the Nasdaq Composite fell 2.2 percent to 19,524.01.
Weaker-than-expected US consumer sentiment data contributed to market declines.
The University of Michigan index fell to 64.7 in February, a nearly 10 percent drop, as inflation concerns increased. The survey’s five-year inflation outlook rose to 3.5 percent, the highest since 1995.
US existing home sales also fell more than anticipated to 4.08 million units. Additionally, the US services PMI entered contraction territory in February, according to S&P Global.
Retail giant Walmart saw its stock decline 2.5 percent after issuing a weaker-than-expected earnings forecast.
Nvidia and Palantir also faced losses as investors moved into defensive sectors. Procter & Gamble rose 1.8 percent, while General Mills and Kraft Heinz advanced more than 3 percent each.
For the week, the S&P 500 declined 1.7 percent, while the Dow and Nasdaq both fell 2.5 percent.
According to Larry Tentarelli, chief technical strategist at Blue Chip Daily Trend Report, the top-performing stocks in the S&P 500 on Friday were from defensive sectors, including consumer staples, utilities, and healthcare.
