The inflation rate within a domestic country largely dictates their domestic currency strength. Investors found the tale ran true on Tuesday night as the UK inflation rate came in at 1.7%, above the expected 1.8%. This created a huge buyback into the GBP as investors linked the higher inflation rate with hints of interest rate hikes from the Bank of England (BoE). Following this release, stronger hints of interest rates hikes were made by the BoE as they now had more support for the event.
Generally, increasing the interest rate dampens inflation levels as it causes a slowdown in borrowing and consumer spending. Now that the inflation rate is more accommodative and is closer to the BoE inflation targets, hikes in the interest rate are more probable.
The Canadian inflation data tonight is a massive consideration for investors and consumers holding the CAD. Inflation expectations are set to jump by 0.5% as a YoY figure; from the previous figure of 1.5% up to expectations of 2%. Needless to say, this potentially significant jump in inflation would be very positive for the CAD/AUD. If the actual figure comes out at 2% investors may not see much movement as the CAD has already gained strength in anticipation of the release. However, if figures come out below we may see a sharp selloff of the CAD/AUD, and of course alternatively, if the figure comes out above expectation investors expect the AUD/CAD to break to parity line and tumble momentarily into weakness.
If you are holding CAD or considering the purchase of it, set your alarms tonight for midnight AEST; because depending on the outcome of the actual figures we could see some big movements.