USD/CAD forecast ahead of the BOC interest rate decision

The USD/CAD pair has been in a strong bullish trend in the past few days. The pair is trading at 1.2642, which is about 1.95% above its lowest level this month. Focus now shifts to the upcoming interest rate decision by the Bank of Canada (BOC).

BOC interest rate decision preview

The BOC will conclude its two-day meeting on Wednesday. It will become the second central bank to deliver its interest rate hike today after the Reserve Bank of New Zealand.

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All indications are that the BOC will deliver its second interest rate hike this year. Analysts believe that this hike will be 0.50%, which will be bigger than the previous 0.25%. As a result, the interest rate will rise to 1.0%, which will be the highest level in years.

This interest rate will be about 75 basis points below the neutral level. A neutral rate is defined as the interest rate that allows maximum economic growth while putting inflation in check. The BOC estimates that this neutral rate is between 1.75% and 2.75%.

Recent economic numbers are supportive of more tightening. For example, recent data showed that Canadian inflation surged to a 30-year high of 5.7%. This inflation was better than the median estimate of about 5.5%.

At the same time, there are signs that the labor market is tightening. On Friday, data by the Canadian statistics agency showed that the unemployment rate dropped to 5.3%. This was the lowest level since the pandemic started. 

The BOC will not the only central bank to embrace a more hawkish tone. The RBNZ made a supersize rate hike in its bid to slow inflation. Similarly, the Federal Reserve started hiking in March and hinted that more hikes were coming. 

USD/CAD forecast

On the 4H chart, we see that the USD/CAD pair has been in a strong bullish trend in the past few months. The pair has moved to the 50% Fibonacci retracement level. It has also moved above the 25-period and 50-period moving averages while the MACD has moved above the neutral level. 

Therefore, it seems like bulls have the momentum to keep pushing the pair higher. If this happens, the next key support level to watch will be at 1.2700.

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