BoC Interest Rate Decision: 25 bps hike expected, economic projections and Macklem speech eyed

• Bank of Canada is set to raise rates by 25 bps rate hike to 5.0% on Wednesday.
• BoC will publish its updated economic projections, Governor Macklem’s presser to follow.
• BoC’s rate outlook and Macklem speech to ramp up volatility around the Canadian Dollar.

The Bank of Canada (BoC) is widely expected to announce another 25 basis points (bps) rate hike at its July monetary policy meeting due this Wednesday, bringing rate hikes back on the table after hitting the pause button in March. 

Bracing for the BoC showdown, USD/CAD is maintaining its corrective mode from a monthly high of 1.3389, as the Canadian Dollar remains underpinned by improving domestic economic activity and tighter labor market conditions.

Bank of Canada interest rate decision: What to know in markets on Wednesday, July 12

• USD/CAD is sitting at two-week lows near 1.3200 amid persistent US Dollar (USD) weakness and a sharp rally in WTI prices. 
• Recent speeches by the Fed officials signaled that the Fed could be nearing an end to its tightening cycle. The benchmark 10-year US Treasury bond yields are trading under pressure below 4.0%.
• Markets are trading with caution ahead of the critical US Consumer Price Index (CPI) data. The US S&P 500 futures are modestly flat on the day. 
• The annual headline US CPI is seen rising 3.1% in June, compared with 4.0% booked previously. Core CPI inflation is expected to soften to 5.0% in the reported month. On a monthly basis, US CPI is likely to increase 0.3% in June vs. 0.1% recorded in May. Core monthly CPI inflation is seen a tad lower at 0.3% vs. 0.4% prior.
• The BoC policy announcements and Macklem’s presser will be key to the short-term direction in the USD/CAD pair in the aftermath of the US CPI data-led market volatility.

Analysts at TD Securities (TDS) offered a more hawkish outlook on the BoC policy decision this Wednesday, stating, “we look for the BoC to hike another 25bps to 5.00% in July. Upward revisions to projections in the July MPR will provide the main catalyst for the hike but we do expect a more balanced statement relative to June after some further erosion of sentiment.”

“We also look for the Bank to leave its guidance open-ended, although we believe 5.00% will mark the terminal rate for the BoC,” they added.

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

The Bank of Canada will announce its policy decision at 14:00 GMT. The policy announcements will be accompanied by the central bank’s quarterly economic forecasts and its assessment of risks. BoC Governor Tiff Macklem will hold a press conference at 15:00 GMT.

The Bank of Canada is likely to raise rates to 5.0% in July from 4.75% seen in June when the central bank delivered a surprise 25 bps lift-off. Markets are pricing about a 68% probability of a quarter percentage point hike by the central bank this week.

Strengthening Canadian economy along with a strong labor market justifies the case for a July rate hike even though the country’s annual Consumer Price Index (CPI) rose at its slowest pace in two years at 3.4% in May. According to Statistics Canada, Canadian Gross Domestic Product (GDP) expanded 0.4% during the month. Meanwhile, the county’s employment data published by the agency showed Canada added 60,000 jobs despite a rise in the Unemployment Rate to 5.4% in the reported month.

However, should the BoC hike interest rates by another 25 bps in July with no clarity on the future policy path, the Canadian Dollar could come under selling pressure, driving the USD/CAD pair back toward 1.3400. The major could also see a sustained rally in case the central bank surprises and holds rates at 4.75%. On the other hand, USD/CAD sellers could flex their muscles and target 1.3100 if the BoC hints at extending its tightening cycle until it brings down inflation to its 2.0% target.

Dhwani Mehta, Asian Session Lead Analyst at FXStreet, offers a brief technical outlook for the USD/CAD: “The pair has breached critical daily support lines to reach the lowest level in two weeks ahead of the BoC rates decision. The Relative Strength Index (RSI) is pointing south below the midline, justifying the USD/CAD weakness.”

Dhwani also outlines important technical levels to trade the major: “Sellers are likely to challenge the 1.3150 psychological level if the Canadian Dollar gathers upside traction on the BoC policy announcements. The next key support is seen at the June 26 low of 1.3117. Alternatively, immediate resistance awaits at the bearish 21-Daily Moving Average (DMA), pegged at 1.3234. Acceptance above the latter is critical to initiate a meaningful recovery toward the 1.3400 round figure.”