The Canadian dollar rose to its highest level in nearly two months on Tuesday, buoyed by hawkish comments from Canada's central bank, while worries about UK political uncertainty dented sterling.
At one point, the Canadian dollar was at its strongest since April 17, at C$1.3274 per US dollar, extending gains after climbing more than 1 per cent on Monday. The loonie last traded at C$1.3293, up around 0.2 per cent on the day.
Bank of Canada Senior Deputy Governor Carolyn Wilkins had said on Monday first-quarter growth was “pretty impressive” and that signs economic growth was broadening would lead the central bank to consider whether current low rates would still be required.
“She delivered a much more hawkish signal than we've seen from the central bank in some time,” said Sue Trinh, head of Asia FX strategy for Royal Bank of Canada's Hong Kong branch.
“Bottom-line, odds of a rate hike by the end of the year from the Bank of Canada have moved up considerably,” Trinh said, adding that markets were now pricing in more than a 50 per cent chance.
UK political uncertainty
Sterling was still looking wobbly after the shock result of Thursday's UK general election, which left Prime Minister Theresa May short of a parliamentary majority that would have strengthened her hand as Britain prepares for Brexit negotiations with Europe.
The pound eased 0.1 per cent to $1.2653, after shedding 2.3 per cent the previous two trading days.
“The prospect of further political uncertainty due to the lack of an overall Conservative majority is likely to weigh on sterling in the short term,” said Jeremy Gatto, senior vice president, trading, for Geneva-based boutique asset manager Unigestion.
On the other hand, the potential for “softer Brexit" rhetoric in a market that is already short on sterling could help support the currency over the medium-term, Gatto added.
Fed policy meet
The greenback was steady to firmer against the yen and the euro ahead of the Federal Reserve's two-day policy meeting starting later on Tuesday.
Against the yen, the dollar held steady at 109.97. The euro eased 0.1 per cent to $1.1193.
With the US central bank widely expected to raise interest rates, investors' focus will be on any fresh hints on the pace of tightening in the months to come, and its assessment of the economy and outlook on inflation.
Investors will also be watching for any fresh details on the Fed's plans for trimming its balance sheet.
“Given that the minutes (of the last Fed meeting) contained lots of details, one possible scenario is that there will be an announcement in June and that it will start in September,” said Masafumi Yamamoto, chief currency strategist for Mizuho Securities in Tokyo, referring to the Fed's possible balance sheet reduction.
Elsewhere, the Bank of England is set to announce an interest rate decision on Thursday, and the Bank of Japan holds a policy meeting on Thursday and Friday.