The USD/CAD has been consolidating since late last Friday. Key levels include 1.346 and 1.345 for the upper bound and 1.341 and 1.340 for the lower bound. The market appears to be in the middle of the storm that might be unleashed after the Bank of Canada’s (BoC) interest rate decision on Wednesday.

In January, the BoC made history by being the first major global central bank to stop its rate-hiking cycle and has kept rates unchanged at its last two policy meetings. However, the economy's unexpectedly robust performance since then has placed the bank in a challenging position and will test its determination to maintain a neutral stance.

After declining from its peak at 8.1% in 2022, inflation in Canada unexpectedly experienced its first increase in 10 months, surging to 4.4% in April from 4.3% in March. The increase is being attributed to the recent rebound in Canada's housing market.

The current market consensus is for an approximately 40% to 45% chance of a 25-basis-point interest rate hike on Wednesday. According to some, this is underestimating the possibility of a rate hike. Which means that the lower bounds of the current consolidation band could easily be tested (and broken) in the lead up to the interest rate decision.

On the other side of the trade, the US dollar faced obstacles as it was revealed that the US services sector experienced minimal growth in May, primarily due to a slowdown in new orders. This news brought an end to the initial surge in the USD, which was triggered by incredibly robust job growth.

Risk Warning: Trading foreign exchange on margin carries a high level of risk and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade foreign exchange, you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and, therefore, you should not invest money you cannot afford to lose. You should make yourself aware of all the risks associated with foreign exchange trading and seek advice from an independent financial adviser if you have any questions or concerns as to how a loss would affect your lifestyle.

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