USD/CAD eyes Bank of Canada decision

• Bank of Canada expected to pause
• US to release manufacturing, services PMIs

The Canadian dollar is showing limited movement on Wednesday. In the North American session, USD/CAD is trading at 1.3436, down 0.19%.

Bank of Canada expected to pause

The Bank of Canada will announce its first rate decision of 2024 later today. The BoC has maintained the cash rate at 5.0% for three straight times and barring further acceleration in inflation, the rate-tightening cycle is over. The key question is the timing of a rate cut. The BoC would love to chop rates and kick-start the weak economy, but a rate cut appears unlikely unless inflation moves closer to the 2% target.

We’ve seen the Federal Reserve grapple with the “last mile” of the inflation battle, as inflation remains stubborn in the range of 3-4%, higher than the 2% target. The BoC has managed to push inflation down from a high of 8.1% in mid-2022 but rose slightly in December to 3.4%. Inflation is currently driven by services and housing costs, which are unlikely to fall considerably in the near term. This means that further rate hikes may not be effective in pushing inflation lower.

The BoC has little reason to raise rates, but it is reluctant to start cutting rates while inflation remains well above the target and wage growth is still high. That leaves BoC policymakers with a strong reason to continue holding rates and remaining cautious until inflation moves closer to the 2% target. When can we expect the BoC to hit the rate-cut button? Two of Canada’s major banks, RBC and BMO, expect a rate cut in mid-2024, while TD Bank is projecting an initial rate cut in the spring.

We’ll get a snapshot of the strength of the US economy over the next two days, starting with PMI releases later today. Manufacturing has been in deep-freeze, with the PMI posting only one gain in the past 15 months. The January PMI is expected to stay unchanged at 47.9. The services sector has fared considerably better and has posted 13 consecutive gains, although many of those readings have barely been above the neutral 50 level and point to stagnation.

The US releases first-estimate GDP on Thursday. The consensus estimate stands at 2.0%, which follows a sparkling 4.9% gain in the third quarter, which was the highest growth rate since Q4 2021.

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USD/CAD Technical

• USD/CAD is testing support at 1.3451. Below, there is support at 1.3360
• There is resistance at 1.3520 and 1.3611

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