USD/CAD analysis as BoC prepares its final rate hike

The USD/CAD exchange rate rallied to the highest level since November 4 ahead of the upcoming interest rate decision by the Bank of Canada (BoC). It rallied to a high of 1.3693, which was about 3.60% above the lowest level in November.

Bank of Canada rate decision

The USD/CAD price has been in a strong bullish trend as the US dollar index rebound continued. After falling to a low of $104 last month, the greenback has staged a strong comeback to about $105.70. This rally happened after the strong American jobs data. 

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The numbers revealed that the American economy added over 283k jobs in November. In the same period, the unemployment rate remained unchanged at 3.7% while the average wage index rose by 5.2%. A new poll by FT warned that US inflation will rise to 5.5% in 2023 as the US sinks to a recession.

As such, most analysts expect that the Federal Reserve will continue hiking interest rates in 2023. According to the WSJ, the bank will likely hike rates above the psychological level of 5%.

The USD/CAD spot exchange rate rose ahead of the upcoming interest rate decision by the Bank of Canada. Economists polled by the Bank of Canada (BoC) believe that the bank will hike rates by 50 basis points, bringing the year-to-date increase to 4.25%. 

Most analysts believe that this will be one of the final rate hikes of this cycle. They have concerns about the vulnerability of the Canadian economy. Most data shows that the economy is facing significant headwinds, with the housing sector being more vulnerable. In a note, analysts at ING said:

“We expect a final 25bp rate hike in early 2023, but this is not a strong call. The housing market is particularly vulnerable, with the mortgage market structure meaning Canadians are more impacted by rising rates than American homeowners.”

The USD/CAD forex rate also rallied as the prices of crude oil retreated. Brent, the international benchmark, dropped to $78.6 while the West Texas Intermediate (WTI) crashed to $73.47.

USD/CAD forecast

The USD to CAD price has been in a strong bullish trend in the past few days. In this period, it has formed an ascending channel shown in green. It has risen above all moving averages while the Relative Strength Index (RSI) moved above the overbought level. 

Therefore, with the Fed and the BoC showing signs of a Fed and BoC divergence, there is a likelihood that the pair will continue rising as buyers target the key resistance at 1.3800.