BoC Rate Decision: Dovish Policy Shift?
Today will see the release of the Bank of Canada (BoC) rate decision at 2:45 pm GMT.
BoC to Hold the Line
The BoC is widely expected to keep its Overnight Rate on hold at 5.0% for a fifth consecutive meeting—a 22-year peak. As per the OIS curve, there’s only a 6% chance that we see a 25bp cut at today’s meeting with the first 25bp cut fully priced in for July (though, as a point of note, we are seeing a 50/50 bet priced for June).
You may recall that Canada’s inflationary pressures eased to 2.9% in the twelve months to January, considerably softer than the 3.4% reading in December 2023 and falling into the central bank’s 1%-3% inflation target range. This was also its lowest rate of inflation since mid-2023 and came in much softer than expected; polled economists forecasted a 3.3% rise. Core inflation also cooled—notably, from the last Rate Statement, it was communicated that the ‘Governing Council is still concerned about underlying inflation’. And unsurprisingly, following the latest inflation print, a dovish repricing took hold in money markets; 44bps were priced for April’s meeting versus 9bps, as of writing.
So, what will traders be watching in this meeting? While a rate change is highly unlikely, the language could be shifted. The recent inflation softness may trigger a slightly dovish shift (albeit cautioning that one month’s data is not sufficient and the central bank will likely require more evidence). Any substantial dovish shift, nonetheless, could weigh on the Canadian dollar (CAD) as investors adjust rate expectations.
USD/CAD Technical Position?
According to both the monthly and daily timeframes, buyers remain in the driving seat.
The FP Markets Research Team noted the following for the aforementioned timeframes (italics):
From the monthly timeframe, we can clearly see the currency pair has formed a long-term consolidation between CAD1.4690 and CAD1.2092 since 2016. More locally, a range has also been in play between support at CAD1.3244 and resistance at CAD1.3818 since late 2022. It is also clear from the monthly chart that February closed out a second straight month in the green, with room to continue exploring higher terrain until range resistance at CAD1.3818.
Overall, then, bulls are in the driving seat for the time being.
The daily timeframe paints a slightly different picture. Although price is indeed advancing, upside momentum has been slowing. Not only is this depicted through price action compressing between two converging lines extended from CAD1.3359 and CAD1.3542 (rising wedge), but the Relative Strength Index (RSI) is chalking up negative divergence (see the resistance at 61.44).
Ahead of the BoC rate decision, any meaningful dovish shift in language could see USD/CAD bulls take aim at the CAD1.36 psychological handle and expose H1 resistance from CAD1.3619. Technically, this psychological level has also exhibited weakness. Note that since testing CAD1.36 on 28 February, subsequent tests failed to provide much in the way of lower lows, movement indicating bullish strength.
BoC to Hold the Line
The BoC is widely expected to keep its Overnight Rate on hold at 5.0% for a fifth consecutive meeting—a 22-year peak. As per the OIS curve, there’s only a 6% chance that we see a 25bp cut at today’s meeting with the first 25bp cut fully priced in for July (though, as a point of note, we are seeing a 50/50 bet priced for June).
You may recall that Canada’s inflationary pressures eased to 2.9% in the twelve months to January, considerably softer than the 3.4% reading in December 2023 and falling into the central bank’s 1%-3% inflation target range. This was also its lowest rate of inflation since mid-2023 and came in much softer than expected; polled economists forecasted a 3.3% rise. Core inflation also cooled—notably, from the last Rate Statement, it was communicated that the ‘Governing Council is still concerned about underlying inflation’. And unsurprisingly, following the latest inflation print, a dovish repricing took hold in money markets; 44bps were priced for April’s meeting versus 9bps, as of writing.
So, what will traders be watching in this meeting? While a rate change is highly unlikely, the language could be shifted. The recent inflation softness may trigger a slightly dovish shift (albeit cautioning that one month’s data is not sufficient and the central bank will likely require more evidence). Any substantial dovish shift, nonetheless, could weigh on the Canadian dollar (CAD) as investors adjust rate expectations.
USD/CAD Technical Position?
According to both the monthly and daily timeframes, buyers remain in the driving seat.
The FP Markets Research Team noted the following for the aforementioned timeframes (italics):
From the monthly timeframe, we can clearly see the currency pair has formed a long-term consolidation between CAD1.4690 and CAD1.2092 since 2016. More locally, a range has also been in play between support at CAD1.3244 and resistance at CAD1.3818 since late 2022. It is also clear from the monthly chart that February closed out a second straight month in the green, with room to continue exploring higher terrain until range resistance at CAD1.3818.
Overall, then, bulls are in the driving seat for the time being.
The daily timeframe paints a slightly different picture. Although price is indeed advancing, upside momentum has been slowing. Not only is this depicted through price action compressing between two converging lines extended from CAD1.3359 and CAD1.3542 (rising wedge), but the Relative Strength Index (RSI) is chalking up negative divergence (see the resistance at 61.44).
Ahead of the BoC rate decision, any meaningful dovish shift in language could see USD/CAD bulls take aim at the CAD1.36 psychological handle and expose H1 resistance from CAD1.3619. Technically, this psychological level has also exhibited weakness. Note that since testing CAD1.36 on 28 February, subsequent tests failed to provide much in the way of lower lows, movement indicating bullish strength.
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