The U.S. dollar appreciated during the week against major pairs. The currency got a boost from the release of the minutes from the January Federal Open Market Committee meeting. The brief statement was slightly hawkish, but the full notes from the meeting revealed the U.S. central bank upgraded its economic projections from those made in December and expects the 2% inflation target to be met in the mid-term. The meeting marked the end of the Fed Chair Janet Yellen era at the helm of the Fed, Jerome Powell will chair the central bank with his inaugural testimony in Washington on Feb. 28, at 8:30 a.m. Eastern.
Dollar Gains After Hawkish FOMC Minutes
European Central Bank (ECB) Mario Draghi will also be active during the week when he testifies before the European Parliament Economic and Monetary Affairs Committee. The EUR has appreciated during the start of the year as European growth expectations could finally be at a point where the ECB feels confident scaling back its stimulus program. With U.S. growth and higher interest rates already priced into the U.S. dollar the euro had more upside, but as the ECB hesitates to signal a clear end to its quantitative easing program and higher rates in 2018 the single currency could suffer.
Fed members were in full force during the week picking up on the trends set down by the FOMC minutes. Growth projections have improved and fiscal policies are anticipated to have a short-term positive effect. The CME FedWatch tool is showing a 83.1% probability of a rate hike during the March 21 Fed meeting.
The U.S. dollar/Canadian dollar (USD/CAD) currency pair gained 0.79% during the last five trading days. The currency pair is trading at 1.2684 on Friday after the higher than expected consumer price index (CPI) released at 8:30 am Eastern. Inflation in Canada was 1.7% in January a slowdown from the 1.9% reading in December, but is still posting to an upward trend in consumer prices. The Bank of Canada (BoC) hiked interest rates three times in 2017 and with inflationary pressures, it is expected to hike another three in 2018.
Disappointing retail sales in December and other economic indicators have weighed more heavily on the loonie than the higher oil prices that have remained above $60 per barrel despite the present threat of higher production from Canada, Brazil and the United States. Higher inflation provided a breather for the CAD as it regained some ground versus the U.S. dollar appreciating 0.39 percent, but not enough to end on a positive note for the week. NAFTA uncertainty still weighs heavily on the Canadian currency with the trade pact renegotiation still with little to show for it as the end of the talks is fast approaching and with elections in Mexico and the United States the trade deal could be further politicized further complicating a three-way agreement this year. Negotiators being the second to last round of talks in Mexico city on Feb 25 until March 5.
Crude oil prices rose in weekly trading for a second week in a row. West Texas Intermediate is trading at $63.69 per barrel on Friday. Weekly inventories in the US surprised with a drawdown of 1.6 million barrels when the forecast called for a rise in crude stocks of 1.9 million barrels. The main factor keeping prices at current levels is the anticipated ramp up in production from U.S. shale companies. Demand for the black stuff has not kept up with supply which is what caused the commodity prices to free fall three years ago until the Organization of the Petroleum Exporting Countries (OPEC) got together with major producers to sign an agreement to limit production. The timing has not worked out for U.S. shale with weather factors holding back higher rig counts.
The softer dollar in the beginning of 2018 also contributed to higher oil prices, but as the greenback is finding its feet as fiscal and monetary policy aligns for higher growth it could also weigh on the price of crude.