FX Forecast May 2023 – Higher interest rates coming?

FX Forecast May 2023 – Higher interest rates coming?
• For information purposes only

USDCAD  Q2 23  Q3 23
Median  1.34  1.33
Mean  1.34  1.33
High  1.40  1.42
Low  1.30  1.29
Forward  1.36  1.36

Economic update and US dollar
The last central bank meeting in the US noted the end of the rate hike cycle by increasing it to 5.25% which is a 5% increase in 14 months. Bank of Canada left the rates unchanged at 4.5%. 
For the past few months, markets have been expecting and induced recession to see the effect of higher interest rates on the economy and financial markets. The equity markets, however, have continued to show resiliency and inflation has proven to be stickier than expected. The US Consumer Price Index, which is seen as a pivotal inflation measure by the US Federal Reserve, showed an increase to 4.4% in April from 4.2% in prior months. Markets are now considering the possibility of another rate hike by the US central bank. Currently, there are rate cuts priced in the Fed fund futures contract, showing the trades expect something to break and US central bank may have to lower the interest rates in 2023. The move was priced in after the regional banking crisis in the US. The developments remain supportive of the US dollar in 2023 amongst G10 countries.

Canadian Dollar
Canadian central bank was the first developed economy to pause the interest rate hikes as the inflation seemed cooling down and the Canadian household debt was too sensitive to mortgage rates which caused concern for economic instability if the rate went higher. 
The latest housing data showed that the housing market is on the rise again which increased speculations that the Bank of Canada may have to raise the rates again in 2023. The higher rates could only temporarily push the buyer out of the market. Coupled with continued higher commodity prices, the Canadian dollar has received support to stay resilient against the US dollar and other major world reserves. Currently trading at 1.36 against USD, CAD is forecast to slightly strengthen by the end of Q2.