USD/CAD Outlook: Investors Brace for the BoC Meeting

• Investors assessed the possibility of a more dovish stance from the Bank of Canada.

• The Bank of Canada will likely hold its key overnight rate at a 22-year high of 5% on Wednesday.

• Money markets expect a 25 basis point cut by June.

Tuesday’s USD/CAD outlook displayed a bullish stance, with the pair lingering close to the highs achieved on Monday. Investors assessed the possibility of a more dovish stance than expected from the Bank of Canada in its policy meeting on Wednesday.

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The Bank of Canada will likely hold its key overnight rate at a 22-year high of 5% on Wednesday. However, investors will focus on the release of updated forecasts on inflation and economic growth. If the central bank revises lower its growth projections, there is a chance the market will anticipate earlier interest rate cuts. 

However, there is still a chance rate cuts will be delayed. After three consecutive months of prices either declining or remaining flat year-over-year, headline inflation in December rose to 3.4% from 3.1%. Additionally, core inflation exceeded expectations. 

This shift prompted money markets to delay their expectations. Currently, money markets expect a 25 basis point cut by June. However, the likelihood of a similar cut in April has decreased from 100% before the December inflation data to 70%.

Economists predict that inflation in Canada will stay more persistent compared to the US. Therefore, the Bank of Canada will likely lag behind the Fed in implementing the first rate cut this year.

USD/CAD key events today

There won’t be any key releases from Canada or the US today. Therefore, investors will anticipate the BoC policy meeting tomorrow.

USD/CAD technical outlook: Price retests 30-SMA 

On the technical side, USD/CAD has pulled back to retest the 30-SMA resistance after bears took control. Buyers gave up control after failing to keep the price above the 1.3501 key resistance level. The shift in sentiment came when the price broke below the 30-SMA and the RSI went below 50. And now, the price is confirming this new direction by retesting the recently broken SMA. Further confirmation will come when the price makes a lower low. 

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Currently, the price is poised to drop to the 1.3401 support level which coincides with the 0.382 fib retracement level. The downtrend will continue if the price breaches this support zone to retest the 1.3300 key level.

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