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USD/CAD price forecast ahead of the BOC’s monetary policy decision

By:
on Jan 25, 2023
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  • The Bank of Canada is expected to raise the policy rate by another 25bp today
  • If the terminal rate is reached, it could push CAD higher
  • 1.32 is a pivotal level for the USD/CAD exchange rate

One of the main events of today’s North American session is the Bank of Canada (BOC)’s monetary policy decision. The market participants expect the central bank to raise the policy interest rate by another 25bp to 4.5% from the current 4.25%.

That is the consensus.

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But this is no ordinary central bank. When it comes to surprising market participants, the BOC is not shy at all.

Several times in the past has failed to deliver what the market has expected. It is not to say that it will do so again too, but one should not rule out such a surprise given the precedents.

Will BOC signal a terminal rate today?

A consensus regarding a 25bp may be in place,  but there is a lot more at stake at today’s decision. More precisely, the focus will be on the bank’s message regarding the terminal rate.

Has it been reached? Will today’s 25bp rate hike be the last one in the current tightening cycle?

If so, the Canadian dollar should benefit as the BOC will turn out to be the first major central bank to reach the terminal rate. Unsurprisingly, one may say, given how highly indebted households are as a result of the rise in the mortgage rate and higher borrowing costs.

1.32 represents a pivotal level for the USD/CAD exchange rate

An exchange rate reflects the value of one currency in terms of another. Today’s BOC decision may be bullish for the Canadian dollar, but one should keep in mind that the Federal Reserve’s decision is due one week from now.

Hence, any market move today should be taken with a grain of salt, unless the USD/CAD makes some significant breakout. One such breakout would be a decline below 1.32 – a pivotal level.

USD/CAD is in consolidation mode for several months. It almost reached 1.40 in October but failed to trade above the round number.

Currently, a triangle as a reversal pattern might indicate more downside. Should the market fall below 1.32, it would break the higher lows series, thus invalidating the bullish trend in place since April 2022.

All in all, today’s BOC monetary policy decision may shape the fate of the Canadian dollar for months ahead. Any indication that a terminal rate is reached should bode well for the loonie dollar.