USD/CAD consolidates near 1.3550 ahead of BoC's monetary policy decision

USD/CAD trades in a tight range near 1.3550 as investors have sidelined ahead of the BoC’s monetary policy announcement.
The BoC is expected to cut interest rates by 25 bps for the third straight time.
The US Dollar delivers a modest correction with US NFP under spotlight.

The USD/CAD pair trades sideways near 1.3550 in Wednesday’s European trading hours. The Loonie asset struggles for direction as investors await the Bank of Canada’s (BoC) interest rate decision, which will be announced at 13:45 GMT.

Investors see the BoC cutting its key borrowing rates by 25 basis points (bps) to 4.25%. This will be the third straight interest rate cut decision by the BoC, which it started in June after gaining confidence that price pressures will return to bank’s target of 2%. Also, the Canadian economy was struggling to bear the consequences of BoC’s restrictive interest rate stance, which forced them to start unwinding high rates.

Though the BoC is widely anticipated to cut interest rates, investors will majorly focus on the interest rate guidance and the economic outlook. Signs of deeper policy-easing this year from the monetary policy statement or BoC Governor’s Tiff Macklem press conference or both would weigh heavily on the Canadian Dollar (CAD).

Meanwhile, the US Dollar (USD) corrects slightly from fresh two-week highs as United States ISM Manufacturing PMI data for August exhibited contraction in the factory activities at a faster-than-projected pace. The PMI came in at 47.2, missed estimates of 47.5 but improved from eight-month low of 46.8.

This week, the major trigger for the US Dollar is the US Nonfarm Payrolls (NFP) data for August, which will be published on Friday. The official employment data will influence market expectations for Federal Reserve (Fed) interest rate cut size this month. Weak payrolls would prompt peculation for Fed large rate cut while steady or better figures would allow the Fed to start the policy-easing process gradually.

Economic Indicator

BoC Interest Rate Decision

The Bank of Canada (BoC) announces its interest rate decision at the end of its eight scheduled meetings per year. If the BoC believes inflation will be above target (hawkish), it will raise interest rates in order to bring it down. This is bullish for the CAD since higher interest rates attract greater inflows of foreign capital. Likewise, if the BoC sees inflation falling below target (dovish) it will lower interest rates in order to give the Canadian economy a boost in the hope inflation will rise back up. This is bearish for CAD since it detracts from foreign capital flowing into the country.