USD/CAD rises to 22-week high, BoC decision looms

• Bank of Canada expected to hold rates at 5.0%
• US to release ISM Services PMI

USD/CAD is trading quietly in Europe at 1.3651, up 0.06%. I expect to see stronger movement in the North American session, with the Bank of Canada making its rate announcement and the US releasing the ISM Services PMI which is expected to show little change.

Bank of Canada widely expected to hold rates

The Bank of Canada is virtually certain to hold rates at today’s meeting, with just a 6% probability of a rate hike, according to the TMX Group. That would leave the benchmark cash rate at an even 5.0%.

BoC Governor Macklem would certainly like to call it quits on the central bank’s aggressive tightening cycle and perhaps he can look for advice from his peers at the Federal Reserve and the Reserve Bank of Australia. Both the US and Australian economies have seen inflation fall significantly, but Jerome Powell at the Fed and Peter Lowe at the RBA have sent the markets a hawkish message that inflation isn’t beaten and the door is open for further rate hikes if necessary. The markets have taken a more dovish stance and are already looking ahead to possible rate cuts.

Macklem appears to face the same challenge of acknowledging that rate hikes have cooled the economy and curbed inflation while sounding credible about keeping open the option of further rate hikes. Last week’s GDP report indicated that the economy contracted by 0.2%, compared to the BoC’s forecast of 1.5% growth. The BoC has hiked repeatedly in order to lower inflation but there are concerns that the rate hikes in June and July may have tilted the risk toward a recession.

The Federal Reserve is widely expected to pause at the September 20^th meeting. The pause could signal that rates have finally peaked, although don’t expect any Fed members to publicly state that the rate-tightening cycle is over.

Federal Reserve Governor Christopher Waller said on Tuesday that the Fed can afford to “proceed carefully” with rate hikes, given that inflation has been falling, and if the downtrend continues, “we are in pretty good condition”.

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USD/CAD Technical

• USD/CAD tested resistance at 1.3657 earlier. The next resistance line is 1.3721
• 1.3573 and 1.3509 are providing support

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