US FOMC & Bank of Canada Rate Decision – Priced in or a Surprise?

US FOMC & Bank of Canada Rate Decision – Priced in or a Surprise?

Today, the market’s focus is on two major events: the US FOMC and the Bank of Canada (BOC) rate decision. However, since both are largely priced in, unless there is a surprise, the market reaction is expected to be relatively calm.

■ US FOMC – A Rate Hold is Fully Priced In

• Policy Rate: A hold at 5.25%–5.50% is 99.5% priced in (CME FedWatch).
• Key Factors:
  • Persistent inflation pressures.
  • Stronger-than-expected US employment data.
  • Uncertainty surrounding Trump’s tariff policies.
• Market Focus:
  • How explicitly will Powell address the timing of the next rate cut?
  • Will he completely dismiss expectations for rate cuts in May/June?
  • If his stance is hawkish, it could lead to USD buying, stock declines, and rising bond yields.
  • Conversely, a dovish tone could trigger USD selling, stock rallies, and falling bond yields.

Currently, the market expects no rate cut in March and 2–3 rate cuts for 2025. The main question is whether this FOMC meeting will shift those expectations.

■ Bank of Canada (BOC) – 7% Probability of a Rate Cut

• Policy Rate: A hold at 5.00% is 93% priced in.
• Market Pricing: 70% probability of a 0.25% rate cut in March.
• Key Considerations:
  • How strongly will Governor Macklem emphasize potential rate cuts?
  • If he signals caution about a March cut, CAD could see some short-term buying.
  • Conversely, if he hints at a cut, CAD could face increased selling pressure.

Since CAD has already been sold off significantly, a fully priced-in result may have a limited market impact. However, if the market perceives the decision as more dovish than expected, CAD could weaken further.

■ Other Key Economic Events

Data Releases:

• Sweden Q4 GDP Flash Estimate
• Sweden Riksbank Rate Decision (Expected 0.25% Cut)
• Germany GfK Consumer Sentiment (Feb)
• Eurozone M3 Money Supply (Dec)
• Mexico Employment Data (Dec)
• US MBA Mortgage Applications (Jan 18-24)
• US Wholesale Inventories (Dec Flash Estimate)
• Brazil Central Bank Rate Decision (Market Consensus: 100bp Cut)

Speeches & Events:

• BoE Governor Bailey to appear before the Treasury Committee.
• US Weekly Crude Oil Inventory Data release.
• Major Corporate Earnings Reports:
  • Meta (Facebook)
  • IBM
  • T-Mobile
  • Tesla
  • Microsoft
  • Lam Research

US tech earnings could significantly influence market sentiment, potentially affecting forex markets.

■ Trading Strategies

① Canadian Dollar (CAD) – Maintain Bearish Bias

• Waiting for the BOC rate decision; additional selling may be considered depending on Macklem’s stance.
• Since a rate cut is already priced in, further downside may be limited. However, if a March cut is clearly signaled, CAD could see increased selling pressure.
• Potential short opportunities in CAD/JPY on retracements.

② US Dollar (USD) – FOMC to Determine Short-Term Direction

• If Powell delivers a hawkish statement, expect USD buying; if dovish, expect USD selling.
• However, since the market has already priced in a hawkish stance, any “as expected” statement may limit further USD gains.

③ Euro (EUR) – Bearish Outlook

• Growing expectations of additional ECB rate cuts are weighing on EUR/USD.
• If the USD strengthens post-FOMC, EUR/USD could test the 1.04 level.
• Potential short opportunities in EUR/JPY on retracements.

■ Summary

• FOMC: Rate hold is fully priced in; Powell’s guidance on future cuts will be the key market driver.
• BOC: A hold is likely, but if Macklem signals a March cut, CAD could face renewed selling pressure.
• Trading Strategies:
  1. Stay bearish on CAD (monitor BOC announcement for additional selling opportunities).
  2. Monitor Powell’s tone post-FOMC for USD direction (hawkish = USD buying, dovish = USD selling).
  3. Bearish bias on EUR (FOMC-driven USD rally could push EUR/USD lower).

After the BOC decision, positions will be reassessed to react accordingly to the FOMC developments.