USD/CAD signal: forecast amid bets of Fed, BoC divergence

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on May 18, 2023
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  • The USD/CAD rate moved sideways after the latest Canada inflation data.
  • The numbers revealed that inflation jumped to 4.3% in April.
  • Analysts expect the Bank of Canada will resume its rate hikes.

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The USD/CAD exchange rate moved sideways as investors priced in a divergence between the US and Bank of Canada (BoC). The pair was trading at 1.3470, where it has been in the past few days. Similarly, the GBP/CAD rate was trading at 1.6800, lower than this month’s high of 1.7128.

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Bank of Canada rate hikes

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The biggest CAD news this week was the latest Canada consumer inflation data that came out on Tuesday. Data published on Tuesday showed that the country’s inflation jumped unexpectedly in April.

According to the statistics agency, the headline consumer price index rose from 4.1% in March to 4.3% in March. It was the first time that inflation jumped since peaking in June last year. At the same time, the CPI jumped by 0.7% in April from 0.4% in the previous month.

There were numerous catalysts for Canada’s inflation in April, including mortgages, rents grocery, and gas prices.

Therefore, the USD/CAD and GBP/CAD pairs are reacting to the latest hopes that the Bank of Canada will deliver interest rate hikes again. The bank has left interest rates unchanged in the past three meetings. Analysts now expect that the bank will hike rates by 0.25% in June. In a note, analysts at Monex Canada said:

“Should the market-implied odds of another hike continue to move higher, we would expect the loonie to rally in the coming weeks.”

Therefore, if the BoC hikes interest rates, it means that it will diverge from the Federal Reserve. Analysts expect that the Federal Reserve will pause its rate hikes because inflation has been falling. Some analysts also expect that the Fed will slash rates later this year.

USD/CAD technical analysis

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USD/CAD chart by TradingView

The USD to CAD exchange rate has moved sideways in the past few days. It is consolidating at the 50-period exponential moving average (EMA). At the same time, the Awesome Oscillator is trading at the neutral point while the Relative Strength Index (RSI) is loitering at 50.

The USD/CAD pair has moved below the key resistance point at 1.3550, the highest point on April 10. Therefore, the pair will likely have a bearish breakout in the near term as sellers target the next key support level at 1.3400. A move below this level will see it drop to the next support at 1.3335.

Bank of Canada CAD USD Forex