USD/CAD finds its feet and rebounds towards 1.2660s after the BoC’s rate hike

• The USD/CAD remains lower in the week, so far down 0.48%.
• The Bank of Canada raised rates and laid the ground for additional hikes.
• May’s US ISM Manufacturing surprised to the upside while price pressures have eased.

The USD/CAD is rising on Wednesday despite a negative knee-jerk reaction to the Bank of Canada's (BoC) decision to hike the overnight rate by 50 bps, lifting it to the 1.50% threshold. USD/CAD soon found its feet, however, and has rallied to 1.2663, snapping a five day losing streak, amidst a dismal market mood, with global equities falling – both factors more supportive of its USD side of the pair.

The USD/CAD dollar jerked lower to a daily low near 1.2600

The BoC lifted rates by 0.50%, using as backdrop high global inflation, driven by elevated energy prices, courtesy of the Russian invasion of Ukraine, China’s Covid-19 related lockdowns, and ongoing supply disruptions. The BoC emphasized that the war “increased uncertainty and put further upward pressure on energy and agricultural commodities prices.”

Regardings Canada’s outlook, the BoC mentioned that Canada’s CPI, at around 6.8% YoY in April, would likely move higher in the near term before showing signs of easing. The central bank noted that inflation continues to broaden, meaning that inflation has nowhere to go but up. The BoC Governing Council added that interest rates would need to rise further and that the central bank’s assessment would guide the pace of hikes. The BoC said it is prepared “to act more forcefully if needed to meet its commitment to achieving the 2% inflation target.”

Market’s reaction

The USD/CAD 1-hour chart shows the pair seesawed in a 44 pip range, between 1.2600-44, with the 20-period simple moving average (SMA) at 1.2644, where it found sellers that put a lid on the USD/CAD's upward reaction. To the downside, USD/CAD found a floor and buying pressure lifted the pair around 1.2600, so that’s the major’s key support level in the near term.

Elsewhere, the US docket revealed the ISM Manufacturing PMI for May, which surprisingly rose to 56.1 in May, from 55.4 in April and beating market forecasts of 54.5. New orders, production, and inventories witnessed jumps while price pressures eased for the second month, from 82.2 vs. 84.6.

USD/CAD Price Forecast: Technical outlook

Overall, the USD/CAD remains pressured to the downside, but USD/CAD buyers are lifting the pair above the 200-day moving average (DMA), which lies at 1.2659. Nevertheless, it’s worth noting that although they are lifting the major upwards, aiming towards 1.2700, solid ceiling levels loom ahead at around 1.2700.

If USD/CAD reaches 1.2700, its first line of resistance would be the 100 DMA at 1.2695. A break above that would send the pair towards the 50 DMA at 1.2708, followed by the May 27 high at 1.2783.

On the other hand, the USD/CAD's first support would be the 200 DMA. A breach of the latter would expose the Bollinger's bottom band at 1.2607.