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USD/CAD forecast ahead of the Bank of Canada decision

By:
on Oct 26, 2022
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  • The USD/CAD pair has dropped sharply in the past few days.
  • It has formed a head and shoulders pattern on the four-hour chart.
  • The Bank of Canada (BoC) is expected to hike rates by 75 basis points.

The USD/CAD price pulled back on Wednesday as investors waited for the upcoming interest rate decision by the Bank of Canada (BoC). It crashed to a low of 1.3512, which was the lowest level since September 23rd. It has crashed by more than 3.28% from its highest level this month.

BoC decision ahead

The Bank of Canada is one of the handful major central banks that is meeting this month. It will conclude its meeting on Wednesday and deliver its outlook for the Canadian economy

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Economists expect that the BoC will continue with its interest rate hike policies in a bid to contain the rising inflation. Precisely, they expect that the bank will hike by another 0.75% and push the main rate to 4%. 

If economists are accurate, such a move will make the BoC one of the most hawkish central banks in the developed world. It was among the first ones to end its quantitative easing (QE) policies. It has hiked rates in all its meetings since January this year. The BoC has hiked rates dramatically in a bid to slow the runaway inflation. 

The most recent data showed that these actions are working. Inflation slowed to 6.9% in September, which was much lower than the year-to-date high of 8.1%. This happened as transportation, recreation, and education costs declined.

Canada’s labor market has also tightened even though its wage growth is still subdued. The most recent numbers showed that the country’s wage growth slowed from 3.5% to 2.9%.

Like the Reserve Bank of Australia, analysts expect that the BoC will start to pivot soon as recession risks rise. As such, it could point to lower rate hikes in the coming meetings.

USD/CAD forecast

USD/CAD

The four-hour chart shows that the USD/CAD forex pair has been in a bearish trend in the past few days. As it dropped, it managed to move below the 25-day and 50-day moving averages and the important support level at 1.3658. 

The Relative Strength Index (RSI) has formed a bearish divergence pattern. Most importantly, it has moved below the neckline of the head and shoulders pattern. Therefore, the path of the least resistance for the USD to CAD pair is lower, with the next key support level being at 1.3400.

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