USD/CAD Forecast Ahead of the BoC Interest Rate Decision

Summary:

USD/CAD is trading lower ahead of the BoC interest rate decision. The focus will be on the central bank's tone and tapering of the bond purchases.

USD/CAD is trading lower as investors eye Wednesday’s BoC interest rate decision. The central bank is expected to leave interest rates unchanged at 0.25%. Notably, the rates have remained at that level since the beginning of the coronavirus pandemic. However, the focus will be on the bank’s tone and the expected tapering of the bond purchases. Analysts expect it to cut the weekly bond purchases by C$1 billion from the current C$4 billion.

Canada is on a steady path to recovery as indicated by the strong economic data released recently. Rise in consumer spending, stable growth in job numbers and an improving housing market fuelling the recovery. However, the rising COVID-19 cases remain a key hurdle to full recovery. The opposing forces of steady economic growth and the coronavirus pandemic are the reason why BoC’s tone is crucial in offering further cues for USD/CAD.

Canada is also scheduled to release its inflation data on Wednesday. However, the impact of the CPI numbers will likely be overshadowed by that of the BoC interest rate decision. Analysts expect a CPI reading of 0.6% MoM compared to the previous month’s 0.5%.

USD/CAD Technical Outlook

After Tuesday’s rally from 1.2478 to 1.2624, USD/CAD has pulled back to its current 1.2592. On a 2-hour chart, it remains above the 25 and 50-day exponential moving averages. Notably, the pair is trading sideways ahead of the BOC interest rate decision.

A cautious tone by the central bank could push USD/CAD higher as the bulls target 1.2650, which will be its highest level since 10^th March. Above that, the next level to watch out for will be 1.2700 – last hit on 8^th March. However, it is likely to experience resistance at 1.2600 in the near term.

On the flip side, if the bank focuses on the country’s economic recovery, the bears will be testing the lower level of 1.2550. However, it will probably find some support-turn-resistance at 1.2575. further down, 1.2500 will be a key level to watch.