Canadian dollar jumps ahead of BoC decision

The Canadian dollar is usually sleepy before the North American session. Today has been unusual, with the currency showing recording steady gains in the Asian and European sessions. USD/CAD is trading at 1.2564, down 0.53% on the day, in anticipation of a rate hike from the Bank of Canada later today.

BoC expected to raise rates

It’s a busy day on the central bank watch, with the BoC making their rate announcement followed by the FOMC meeting. Most economists do not expect the BoC to raise rates, but the markets are more hawkish and have priced in a 0.25% rate hike at 70%. The labor market is robust and inflation is running at a 30-year high. In normal times, this would virtually guarantee a hike, but these are not normal times. The Omicron variant continues to spread rapidly and many provinces have renewed health restrictions. The BoC is expected to revise downwards its growth forecast for Q1 and would prefer not to make any moves during a pandemic, but the surge in inflation may prove to be too much for the bank to ignore.

If the BoC does press the rate trigger, USD/CAD should continue to fall towards the symbolic 1.25 line. However, if the bank opts to stay on the sidelines, there would be some disappointment from investors and I would expect USD/CAD to strengthen. The FOMC meeting will also impact on the movement of the pair, which means that the Canadian dollar’s biggest moves should be against the pound, euro and New Zealand and Australian dollars.

The Fed policy decision follows the BoC, with no rate move expected. However, the likelihood of a March lift-off stands at 94%, making it a virtual certainty. The key question swirling in the markets is how aggressive will the Fed be in 2022. The baseline assumption is that the Fed will implement four rates hikes of 0.25% each. Still, the risk of additional hikes, given the surge in inflation, is tilted towards the upside. Will Fed Chair Powell confirm a March move? If so, the US dollar should move higher. If, on the other hand, Powell suggests that inflation could ease after a few hikes, we should see a risk-on mood in the markets which will weigh on the US dollar.

USD/CAD technical

• There is support at 1.2495 and 1.2405.

•  1.2632 was tested in resistance on Tuesday, but has some breathing room. Above, there is resistance at 1.2679.