Canadian Dollar calm ahead of BoC decision

The Canadian dollar is slightly lower on Wednesday. In the European session, USD/CAD is trading at 1.3559, down 0.09%.

Bank of Canada expected to stay pat

The Bank of Canada is widely expected to hold the cash rate at 5.0% at today’s meeting. The BoC’s rate policy has been “higher for longer”, with policy makers reluctant to lower rates until there is evidence that inflation is beaten. The BoC’s steep tightening cycle has pushed inflation all the way down to 2.8%, but that is still considerably higher than the inflation target of 2%.

The BoC has been cautious about lowering rates, with Governor Macklem saying last month that it was too early to lower rates as core inflation remained too high. The markets, however have been more hawkish and are eyeing a rate cut in the next few months. Although the BoC is likely to maintain rates at today’s meeting, the odds of a quarter-point cut in June stand at 78%, up from 70% at the end of March, with a July cut fully priced.

In an ideal world, the Bank of Canada would wait for the Federal Reserve to raise rates first so that the BoC move would have greater impact. A Fed cut would likely give a boost to the Canadian dollar which would help dampen inflation.

The US economy, however, continues to surprise with its resilience, with last week’s blowout nonfarm payrolls the latest example. The strong economy and persistent inflation could result in the Fed delaying an initial rate cut. The markets have priced in a June cut at 53% and a July cut at 73%, according to the CME’s FedWatch tool.

USD/CAD technical

• USD/CAD tested resistance at 1.3572 earlier. Then next resistance line is 1.3666.

• 1.3497 and 1.3403 are providing support.