FX Forecast February 2023

US dollar

US Federal Reserve increase the policy interest rates by 0.25% to 4.75% on February first which was lower than the 0.5% markets expected and was received as a rather dovish sign by the markets.

The Fed Chair, Jerome Powel, emphasized that the disinflationary process in the US economy has started but reiterated that more hikes are coming to ensure the inflation will continue the downward trend to get closer to the 2% annual target.

The move pushed the US dollar down as other central banks around the world continued with their hawkish plans. The US dollar index (DXY), which measures the greenback against a weighted basket of other six major global peers, was trading at record-high levels throughout 2022 but now has declined to 103.4.

The US economy in the meanwhile added a staggering 517k jobs in January which pushed unemployment to decades lows. This good news may lead to more hawkishness from Fed which supports the US dollar.

The overall trend for the US dollar in February is however expected to be downward as other major currencies like EUR and JPY gain ground against USD.

Canadian Dollar

Canadian central banks called off their rate hikes with the last 0.25% increase to 4.5%. The move pushed the Canadian dollar down which tested the floor of 1.32 against the USD dollar. Canadian inflation is not as high as the US and Canada’s economy and the housing market in specific very sensitive to the higher interest rates as a great portion of Canadians have a variable mortgage rate.

The Median forecast for the Canadian dollar against the US shows 1.34 for the first quarter with a high of 1.40.

West Texas Intermediate oil prices had a bit of a rally in mid-January but declined back to around US$75 a barrel. The elevated yet volatile commodity prices could still provide some level of support for the Canadian dollar but may eventually disappear.

Overall, the upside for the Canadian dollar is limited throughout February.