USD/CAD advances toward 1.3700 ahead of US data, BoC policy meeting

The USD/CAD pair rises toward the round-level resistance of 1.3700 in Wednesday’s European session. The Loonie asset ticks higher ahead of the Bank of Canada’s (BoC) interest rate policy in which it is expected to announce a rate-cut decision of 25 basis points (bps). This would be the first dovish interest rate decision by the BoC after maintaining a hawkish rhetoric for more than two years.

In the last six meetings, the BoC holds interest rates steady at 5%. The BoC was maintaining a status-quo as policymakers were not convinced that inflation will sustainably return to the desired rate of 2%.

The reasoning behind firm speculation for the BoC to begin reducing interest rates is the decline in central banks’ preferred inflation measure-which is core Consumer Price Index (CPI)- to 1.6% on a year-on-year basis. Also, cooling labor market conditions prompt expectations of BoC pivoting to policy normalization. Canada’s Unemployment Rate rises to 6.1% above the 5% threshold.

Meanwhile, mild strength in the Loonie asset is also driven by further recovery in the US Dollar (USD) ahead of the United States (US) ISM Services PMI and the ADP Employment data for May, which will be published in the New York session.

The ADP agency is expected to show that fresh private payrolls were 173K, lower than 192K in April. The Services PMI, which gauges the service sector activity that accounts for the two-third of the economy, is estimated to have returned to expansion, seen at 50.5, higher than the former release of 49.4. The economic data will influence market speculation for the Federal Reserve (Fed) to begin reducing interest rates from the September meeting.