BoC hold rates, Canadian dollar hits 5-month low

• Bank of Canada holds rates at 5.0%
• US ISM Services PMI hits 6-month high

The Canadian dollar has edged lower on Thursday. In the European session, USD/CAD is trading at 1.3662, up 0.20%.

Bank of Canada holds rates at 5.0%

The future markets had priced in a hold from the Bank of Canada at a massive 94%, and there were no surprises as the central bank maintained the benchmark cash rate at 5.0%, after back-to-back increases. BoC Governor Macklem usually holds a press conference following the rate meeting, but Macklem will speak in Calgary later today and is expected to discuss the rate pause. That means the Canadian dollar could show some volatility later today. The Canadian dollar eased slightly in the aftermath of the decision but then recovered almost all of the losses.

Is the BoC finished with rate hikes? The BoC’s rate statement was on the hawkish side and clearly left the door open to further rate increases. The BOC noted that “there has been little downward momentum in underlying inflation” and warned that the longer high inflation persists, the more difficult it becomes for the BoC to restore price stability.

At the same time, weakness in the economy could make it difficult for the BoC to continue raising rates. GDP for the second quarter was softer than expected, with a contraction of 0.2%. The central bank is committed to bringing back inflation to the 2% target but is wary of choking off growth and tipping the economy into a recession. The aim is to guide the economy to a soft landing, which is a tricky task, as any central bank head will nod in agreement.

In the US, the ISM Services PMI accelerated to 54.5 in August, up from 52.7 in July and above the estimate of 52.5. This marked the strongest growth in six months. The ISM survey noted improvements in business activity and employment and optimism about business and economic conditions.

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USD/CAD Technical

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

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