The USDCAD price will be in the spotlight on Wednesday as investors reflect on the latest interest rate decisions by the Bank of Canada (BOC) and Federal Reserve. The pair is trading at 1.2600, which is a few points below its highest level this week.
BOC decision preview
The Bank of Canada will conclude its two-day meeting on Wednesday and then publish its first decision of the year.
Most economists expect that the BOC will deliver a relatively hawkish interest rate decision. More precisely, they expect that the BOC will implement its first hike since the pandemic started.
If this happens, the bank will hike rates by about 25 basis points to 0.50%. It will also end all its asset purchases program this week.
The prediction of a hawkish BOC is based on the fact that the Canadian economy is doing well even as the Delta and Omicron variants spread.
For example, data published in the first week of this month showed that the Canadian consumer price index (CPI) declined to 5.9% in December. The decline was better than what most analysts were expecting. It was also the first time that the rate dropped below the key level at 6.0%. The participation rate has also been rising.
Additional data by the Ivey Institute showed that the manufacturing and services sectors were doing modestly well in December. The two remained solidly above the 50 threshold even as more companies complained of rising costs.
Most importantly, Canadian inflation is rising as well. The headline consumer price index (CPI) continued rising in December.
Another reason why the BOC will sound hawkish is that the price of crude oil has risen to the highest level in seven years. Higher prices are usually bullish for the Canadian economy because of the volume it exports. Also, the country is about to end all the Covid-19 restrictions.
Fed interest rate preview
The USDCAD pair will also react to the latest interest rate decision by the Federal Reserve. Unlike the BOC, the Fed is not expected to lift-off in its first rate decision of the year.
Instead, analysts expect that the Federal Reserve will leave its interest rates unchanged at the range of 0% and 0.25%. The closely watched dot plot will also point to between 3 and four interest rate hikes for this year. As such, analysts believe that the bank will push rates to 0.75% by December.
Economic data support a hawkish Fed. Inflation has jumped to the highest level in over 40 years, while the unemployment rate has dropped to the lowest level since the pandemic started. Additionally, the housing market has continued to strengthen. For example, data published last week showed that the country’s building permits, housing starts, and existing home sales have risen sharply in the past few months.
However, because of the Omicron variant and the Russian tensions, there is a likelihood that the Fed will sound a bit dovish.
The USDCAD pair is trading at 1.2600. On the daily chart, this price is between the ascending channel shown in black. The pair is also along the 25-day and 50-day moving averages, while the Relative Strength Index (RSI) has moved to the neutral level of 50.
Therefore, there is a likelihood that the pair will have a pullback as investors reflect on the interest rate decisions by the BOC and the Federal Reserve. If this happens, the pair will test the lower side of the channel at 1.2465.