- Bank of Canada announced its latest interest rate decision, leaving a comparative rate at 2.75%.
- The European Central Bank is preparing for the decision on the rate on Thursday, where the interest rates are expected to drop by 0.25%, reducing the comparative rate to 2%.
- EUR/CAD is flat below the 20-day straight movable average (SMA), providing resistance near 1.5632.
EUR/CAD trades flat in the early hours of the American session on Wednesday after Bank of Canada (BOC) announced the decision to leave interest rates unchanged at the level of 2.75%.
After the decision of Bank Canada, the couple still trade in a narrow zone, and resistance is created in a 20-day straight movable medium (SMA) near 1.5632 at the time of writing.
Because interest rates remain a key driving force of the currency exchange rate of many major currency pairs, the discrepancy of monetary policy between ECB and BOC seems to be largely valued, and the markets focus on a broader economic risk.
Will EBC limit or remain in the Thursday’s decision about the stake?
After the inflation data from the euro area showed clear signs of facilitation on Tuesday, the release of the shopping managers (PMI) on Wednesday provided a mixed image on the health of production and services sectors in the euro area.
Although PMI data from Italy and France appeared above estimates, Germany has still achieved worse results, which suggests that the trust of business and the development prospects of the country remain gloomy.
Hamburg Commercial Bank (HCOB) reading PMI on May, published on Wednesday, overlooked an estimated 48.6, reaching 48.5, while HCOB PMI services reached 47.1, below respect 47.2. In both readings, there is a lack of analysts’ forecasts, the German economy shows signs of weakness, because trust in the country has recently burdened.
The combination of clear signs of economic slowdown and slowing down inflation is seen as a warning sign of potential recession, because consumer expenditure and demand for goods and services are expected to fall.
In the case of Canada, work efficiency, released by Statistics Canada, fell below the analysts’ estimates by 0.4% growth in the first quarter, and printing QOQ reading at 0.2% in Q1.
FAQ central banks
Central banks have a key ticket that makes sure that there is price stability in the country or region. The economies constantly face inflation or deflation when the prices of some goods and services range. Permanent rising prices of the same goods mean inflation, constant reduced prices for the same goods mean deflation. The task of the central bank is to maintain demand in a queue by adapting its policy. In the case of the largest central banks, such as the US Federal Reserve (FED), the European Central Bank (EBC) or Bank of England (Boe), the mandate is to keep inflation nearly 2%.
The central bank has one significant tool to obtain higher or lower inflation, and this by improving the rate of comparative policy, commonly known as the interest rate. In the moments of pre -built, the central bank will issue a statement with its rate of rules and will provide additional justification why it remains or changes (cutting or wandering). Local banks will properly adapt their savings and loan rates, which in turn will make it hard for people to earn on savings or for companies to take loans and make investments in their companies. When the central bank significantly increases interest rates, it is called a monetary exacerbation. When it lowers its comparative indicator, it is called a cash chain.
The central bank is often politically independent. Members of the Central Bank Policy Council are passing a series of panels and interrogations before the appointment of the Polityka Council. Each member of this council often has some conviction about how the central bank should control inflation and subsequent monetary policy. Members who want very loose monetary policy, with low rates and budget-friendly loans, in order to significantly boost the economy, while being satisfied to see inflation slightly above 2%, are called “pigeons”. Members who rather want to see higher rates to reward savings and want to lithe inflation all the time, are called “hawks” and will not rest until inflation has or is below 2%.
Usually there is a chairman or president who conducts every meeting, must create a consensus between hawks or pigeons and has its last word when it comes down to dividing the votes to avoid a draw 50-50 about whether the current policy should be adapted. The chairman will give speeches that can often be observed live, in which the current cash attitude and perspectives are communicated. The central bank will try to send its monetary policy without causing sudden fluctuations in rates, shares or currency. All members of the Central Bank will direct their position to markets before the politics event. A few days before the political meeting until the recent policy is transferred, the members must not be publicly talked to. This is called a period of blackout.
