Bank of Canada Preview: No policy change expected following July's taper

• Bank of Canada (BoC) is largely expected to keep policy settings unchanged.
• Latest GDP data could force BoC to adopt a cautious tone.
• Next target on the upside for USD/CAD is located at 1.2650.

The Bank of Canada (BoC) is widely expected to keep its QE program and the policy rate of 0.25% unchanged following the September meeting. In July, the BoC decided to reduce the target of weekly net asset purchases of the government of Canada bonds to C$2 billion from C$3 billion.

BoC could acknowledge loss of momentum in economic activity

In July's Monetary Policy Report, "the QE adjustment reflects continued progress towards recovery and the bank’s increased confidence in the strength of the Canadian economic outlook," the BoC noted. However, the latest GDP report from Canada revealed that the economy contracted by 1.1% on a quarterly basis in the second quarter, missing the market expectation for an expansion of 2.5% by a wide margin. Moreover, the Net Change in Employment arrived at +94,000 in July, compared to analysts' estimate for an increase of 177,500. 

Meanwhile, the BoC's Core Consumer Price Index rose to 3.3% on a yearly basis in July from 2.7% in June. Nevertheless, the BoC could opt out to adopt a cautious tone despite rising inflation and wait until the October meeting to outline how it will continue to reduce asset purchases. 

All 34 economists that took part In a recently conducted Reuters survey noted that they don't expect the BoC to change its policy rate this week. Furthermore, the majority of economists still see the BoC hiking its policy rate toward the end of 2022.

USD/CAD technical outlook

After reaching its strongest level since December at 1.2949 on August 20, the USD/CAD pair reversed its direction and declined to 1.2500 area last week as the greenback faced strong selling pressure amid the disappointing August jobs report.

With the USD starting the new week on a firm footing and crude oil prices struggling to extend the recovery, USD/CAD managed to reclaim the 200-day SMA, which is currently located at 1.2530. Additionally, the Relative Strength Index (RSI) indicator edged higher to 50, suggesting that the bearish momentum is losing strength.

In case the BoC delivers a dovish statement, the CAD is likely to weaken its major rivals. On the upside, the initial resistance is located at 1.2600 (20-day SMA) ahead of 1.2650 (Fibonacci 23.6 retracement of June-September uptrend). A daily close above the latter could open the for additional gains toward 1.2700 (psychological level) and 1.2750 (static level).

Supports, on the other hand, are located at 1.2530 (200-day SMA), 1.2500 (psychological level, static level) and 1.2430 (Fibonacci 38.2% retracement).