USD/CAD remains near three-week lows ahead of the BoC decision

• The USD/CAD pair fell to its lowest level since May 11 at 1.3390.
• Investors await BoC's decision, expected to maintain rates at 4.5%.
• Canadian yields increase, giving support to the CAD.

The USD/CAD stretched lower on Tuesday trading in the 1.3389 - 1.3452 range despite the US dollar maintaining its foot versus other peers, with the DXY index trading with gains at the 104.20 level. Ahead of Wednesday’s Bank of Canada (BoC) interest rate decision, Canadian yields are edging higher, giving the Canadian Dollar traction.

Canadian yields rise ahead of BoC decision

On Wednesday, investors will eye BoC's interest rate decision where Governor Tiff Macklem and the rest of the policymakers are expected to keep interest rates at 4.5%. In that sense, the clear deceleration in the previous inflation figures gives room for the BoC to keep rates steady. In addition, the Canadian Ivey PMI came in weak in May, retreating to 53.5 vs the 57.2 expected, supporting expectations of a no-hike as economic activity shows weakness.

Meanwhile, Canadian bond yields are advancing across the curve. The 10-year bond yield rose to 3.33%, while the 2-year yield stands at 4.42%  and the 5-year yield stands at 3.57%.

Taking into account the upcoming Federal Reserve (Fed) decision, according to the CME FedWatch Tool, investors are betting on a 73.6% probability of the Fed not hiking rates at their next meeting in June and maintaining the target rate at 5.25%. However, the decision will rely heavily on upcoming May Consumer Price Index (CPI) data, where the headline inflation is expected to decelerate to 4.2% (YoY) from 4.9%, while the Core rate to accelerate to 5.6% (YoY) from the last 5.5% reading. In that sense, the expectations of the upcoming decision may have an impact on the US Dollar.

Levels to watch

Technically speaking, the USD/CAD maintains a bearish outlook for the short term, as per indicators on the daily chart. The Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) are both showing weakness standing in negative territory, and the pair trades below its main moving averages indicating that the sellers have the upper hand. The shorter-term charts as the 4-hour also suggest bears' dominance with technical indicators deep in the red.

On the downside, the next support levels to watch are the daily low at the 1.3389 zone, followed by the 1.3350 and 1.3335 areas. On the other hand, a move above the 1.3450 zone may reignite the bulls' momentum, with next resistances at 1.3470 and the convergence of the 20-,100- and 200-day Simple Moving Averages (SMAs) around the 1.3500 area.