USD/CAD Forecast: Loonie Smoked Ahead of BoC Decision

Summary:
• The USD/CAD rose to the highest point since November 30 as investors waited for the upcoming interest rate decision by the Bank of Canada

The USD/CAD rose to the highest point since November 30 as investors waited for the upcoming interest rate decision by the Bank of Canada (BoC). It surged to a high of 1.3610, which was substantially higher than this week’s low of 1.3388. 

Bank of Canada and Fed decisions

The USDCAD exchange rate rallied after a relatively hawkish report by the Wall Street Journal (WSJ). In it, the paper reported that the Fed was inclined to push rates above 5% in 2023 after a series of strong economic data from the US. 

On Friday, data showed that the American economy added more than 283k jobs in November while the unemployment rate remained unchanged at 3.7%. Wages jumped by 5.2% even as big technology and media companies like Meta, Twitter, and Warner Bros shed thousands of jobs. And on Monday, data showed that the non-manufacturing PMI soared in November.

The biggest catalyst for the USD/CAD exchange rate will be the upcoming interest rate decision by the Bank of Canada (BoC). Economists expect that the central bank will hike rates by another 0.50% to 4.25%. The decision comes at a time when Canada’s inflation was still high. According to the Bureau of Statistics, the country’s annual inflation rose to 6.9% in October as gasoline and mortgage rates surged.

Most importantly, the BoC decision comes at a time when Canada’s yield curve has plunged to the lowest level since the 1980s. The spread between the 10- and 2-year bonds rose to 100 basis points, signaling that the economy is heading towards a big recession. Therefore, the BoC will likely deliver a dovish rate hike.

USD/CAD forecast

The USD/CAD price has been in a bullish trend after falling to a low of 1.3225 in November. It has risen above the standard pivot point while the 25-day and 50-day moving averages have rallied. The Relative Strength Index (RSI) has moved close to the overbought level. A closer look shows that the pair has formed an inverted head and shoulders pattern.

Therefore, the pair will likely continue rising as buyers target the second resistance level at 1.3760. A drop below the important support at 1.3500 will invalidate the bullish view.