Dollar Strength Expected to Continue Amid Hawkish Sentiment

The strong US dollar is likely to continue its upward trend as investors anticipate a potential interest rate hike by the Federal Reserve in September. Fed Chair Kevin Warsh has emphasized that inflation remains too high and the economy is growing strongly, suggesting that a rate increase will be necessary.

The renewed spike in energy prices has added to the hawkish sentiment in the market, with traders pricing in another 80 basis points of tightening by next summer. However, our team believes this is highly unlikely and expect markets to remain reluctant to take the other side of this trade until there is more clarity on events in the Middle East.

The Canadian dollar is also expected to remain under pressure as the Bank of Canada holds interest rates steady at 2.25%, despite core inflation remaining well-anchored around 1.9-2.0%. The impact of trade uncertainty on business spending and hiring plans, as well as consumers, remains a concern for the Canadian economy.