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USD/CAD Consolidates ahead of BoC Rate Decision

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The USD/CAD is struggling to overcome the 1.3380 resistance, as investors anticipate a Bank of Canada (BoC) interest rate decision for more direction. BoC officials may raise rates further to reign in inflationary pressure.

The Bank of Canada is expected to further increase its benchmark rate to 4.5%. This would be the eighth consecutive raise in interest rates – meaning an amplified borrowing fee for both businesses and individuals alike.

The case for standing pat is still on the table. Even though the markets are assuming a low probability of no change in BoC interest rates due to impending recession risks, it is still wise to wait for strong confirmation before entering a bearish position on USD/CAD. The accompanying monetary policy statement and post-meeting press conference will be critical towards determining the near-term direction of the Canadian Dollar and consequently influencing this pair’s direction.

After a year of consistent rate hikes, the central bank no longer has an undisputed agreement on whether to impose another increase – or even if they should. The Bank of Canada is determined to bring inflation levels under control and believes that raising rates is the most effective way to do so.

Despite the rate hikes, inflation has only fallen from a 40-year high of 8% to 6.3% last month. Although this is progress, it still surpasses the upper limit that’s desirable for the bank–which is why a majority of economists are anticipating another hike soon.

Canada’s Annual Inflation

USD/CAD Consolidates ahead of BoC Rate Decision
Source: Statistics Canada

A Reuters survey recently revealed that Governor Tiff Macklem’s stringent policy-tightening venture is likely to be subdued as market analysts prepare for a 25 basis points (bps) increase in the interest rate up to 4.50%. The Canadian central bank, according to the survey, will likely keep rates at 4.5% through 2023 and thus signifying this might possibly mark an end of any more tightening measures.

Canada’s headline inflation was reported 6.3% in December and it seems like it’ll stay over 2% till Q3 2024.

What to expect for USD/CAD?

On Wednesday, the USD/CAD pair is having a difficult time making any kind of meaningful progress and continues to drift near its weekly low. The upside seems curtailed due to the underlying bearish sentiment surrounding the US Dollar that has been exacerbated by rising expectations for a more moderate policy tightening from the Fed.

As the markets anticipate an expected decrease in hawkishness from the US central bank, along with indications of tamed inflationary forces and bullish Asian equity markets, it has caused a drag on the safe-haven currency. This headwind is proving to be detrimental for major currencies as it predicts that there will only be a 25 bps rate hike at most in February.

The Loonie, linked with commodities like crude oil, is suffering due to the overnight pullback in its prices; this helps limit losses for the USD/CAD pair — at least temporarily. The latest optimism towards renewed Chinese fuel demand has been overshadowed by warnings of global economic slowdown and growing US inventories. A report from American Petroleum Institute (API) has revealed a 3.4-million-barrel build in US crude stocks during January 20 week alone, intensifying worries about the oil market.

The potential for these constraints could limit the upside of oil prices, thus providing support to the pair. But traders seem hesitant going into the Bank of Canada monetary policy meeting, which further adds to their reluctance.

USD/CAD Daily Chart

USD/CAD
Source: Trading view

If sellers manage to push the USD/CAD pair towards 1.3400, they may be met with resistance near the weekly high of 1.3415-1.3420 and thus cap its ascent – that is until some follow-through buying triggers a short-covering rally which will propel spot prices up to around the psychological mark of 1.3500 before finally reaching 100 day SMA at 1.3515-1.3520 region; crossing this key point would trigger the bullish bias for the USD/CAD.

However, the pair’s inability to break through the 100-day Simple Moving Average last week suggests that the downtrend is still in place, providing a great opportunity for bearish traders. A move below 1.3320 could indicate an even further drop, possibly all the way down to sub-1.3200 levels near the 200-day SMA which would provide confirmation of a new bearish breakout and open up possibilities for more significant losses over time.

With GDP data soon to be released, the US Dollar faces potential volatility. Analysts expect annualized GDP to fall to 2.8% from its prior value of 3.2%.

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