Bank of Canada’s Outlook to Shape Canadian Dollar’s Trajectory

CANADIAN DOLLAR FORECAST:

• The Bank of Canada will announce its July monetary policy decision on Wednesday
• The central bank is seen lifting interest rates by 25 basis points to 5.0%
• BoC’s guidance is likely to shape the course of the Canadian dollar in the near term

Most Read: US Dollar Trips Ahead of US Inflation Data, USD/JPY Swoops on Fibonacci Support

The Bank of Canada will announce its July monetary policy decision on Wednesday. Markets expect the central bank to raise borrowing costs by 25 basis points to 5.0%, the highest level since 2001, as part of the ongoing fight against persistently high price pressures. If confirmed, the move would mark the second consecutive quarter-point hike, following a brief hiatus earlier in the year.

Rather than focusing on the rate decision itself, traders should pay more attention to forward guidance and general comments about economic prospects. With the Canadian economy holding up better-than-expected, labor markets resilient and core inflation struggling to come down, the institution led by Tiff Macklem may be inclined to leave the door open to further tightening in the coming months.

BOC INCOMING RATE DECISION

Source: DailyFX Economic Calendar

Market pricing suggests that there is a small probability of another 25 bp hike after the July meeting. The odds of this event could consolidate and drift higher if the bank continues to flag that the economy remains in excess demand and signals that its stance is not sufficiently restrictive to restore price stability. That said, a hawkish outlook is likely to be supportive of the Canadian dollar.

Conversely, if the BoC indicates that it will take a more cautious stance and signals another conditional pause to assess the effects of past actions, USD/CAD could find momentum to extend its rebound and march higher, although this outcome would also depend on what happens with the U.S. July CPI report, which is also due on Wednesday morning.

USD/CAD TECHNICAL ANALYSIS

After failing to clear above Fibonacci resistance and the 50-day simple moving average around the psychological 1.3400 handle, USD/CAD began to dribble lower, with the pair now probing technical support in the 1.3265 area. While prices could bottom out and establish a base around these levels, a breakdown could reinforce weakness and set the stage for a move toward 1.3200, followed by a possible retest of the 2023 lows.

On the flip side, if USD/CAD manages to rebound off support, overhead resistance stretches from 1.3390/1.3410. Upside clearance of this barrier, however, could create the right conditions for a rally towards 1.3450.

USD/CAD TECHNICAL CHART

USD/CAD TECHNICAL CHART