When is the BoC monetary policy decision and how could it affect USD/CAD?

BoC Monetary Policy Decision – Overview

The Bank of Canada (BoC) is scheduled to announce its monetary policy decision this Wednesday at 15:00 GMT and is widely expected to hike its benchmark interest rate by 25 bps to 0.50%. This would mark the first rate hike since October 2018 and the start of the tightening cycle amid the recent surge in Canada’s annual inflation rate to the highest level since 1991. Apart from this, investors will closely scrutinize the accompanying monetary policy statement for fresh clues about the central bank's policy outlook.

According to Dhwani Mehta, Senior Analyst and Editor at FXStreet: As the BOC 25 bps rate lift-off is well discounted by the market, the focus will remain on any hawkish tilt in the forward guidance. Governor Tiff Macklem and Co. could hint at aggressive tightening plans instead of a gradual approach towards normalizing monetary policy.

How Could it Affect USD/CAD?

Heading into the key event risk, the USD/CAD pair slipped back below the 1.2700 mark and was pressured by a combination of factors. A goodish recovery in the risk sentiment forced the safe-have US dollar to trim a part of its early gains to the highest level since June 2020. On the other hand, strong follow-through rally in crude oil prices to a fresh multi-year high underpinned the commodity-linked loonie and exerted some downward pressure on the major.

A more hawkish BoC would be enough to provide an additional boost to the Canadian dollar and pave the way for a further near-term depreciating move for the pair. That said, any immediate market reaction is more likely to be limited as the focus remains glued to developments surrounding the Russia-Ukraine saga. Nevertheless, the set-up seems tilted in favour of bearish traders and supports prospects for additional losses.

From current levels, any subsequent slide is likely to find decent support near mid-1.2600s. This is followed by the February monthly low, around the 1.2635 region, which coincides with the 100-day SMA. A convincing break below will make the pair vulnerable to break below the 1.2600 mark and test the 1.2570-1.2560 support before eventually dropping to the very important 200-day SMA, near mid-1.2500s.

On the flip side, the 1.2750 region now seems to have emerged as an immediate resistance ahead of the 1.2780-1.2785 static hurdle. Some follow-through buying beyond the 1.2800 mark might shift the bias in favour of bullish traders and lift the pair towards last week's swing high, around the 1.2875-1.2880 zone. A subsequent strength beyond the 1.2900 mark has the potential to push the pair to 2021 high, around the 1.2960-1.2965 area.

Key Notes

 •  Bank of Canada Rate Decision Preview: Hawkish hike to exacerbate the pain in USD/CAD

 •  BoC: Four scenarios, USD/CAD to tick down -0.20% with expected 25bp rate hike – TDS

 •  USD/CAD Analysis: 1.2650 holds the key for bulls amid geopolitical risks, ahead of BoC/Fed’s Powell

About the BoC Interest Rate Decision

BoC Interest Rate Decision is announced by the Bank of Canada. If the BoC is hawkish about the inflationary outlook of the economy and raises the interest rates it is positive, or bullish, for the CAD. Likewise, if the BoC has a dovish view on the Canadian economy and keeps the ongoing interest rate, or cuts the interest rate it is seen as negative, or bearish.