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Following in the footsteps of its commodity dollar rival, the Bank of Canada surprised markets by raising its benchmark interest rate by 25bps to 4.75%. While not as big of a shock as yesterday’s move by the RBA, most economists and traders had expected the Bank of Canada to stand pat in today’s meeting.
In its statement, the Bank of Canada cited stubbornly high inflation as the primary factor driving the decision:
“The Bank continues to expect CPI inflation to ease to around 3% in the summer, as lower energy prices feed through and last year’s large price gains fall out of the yearly data. However, with three-month measures of core inflation running in the 3½-4% range for several months and excess demand persisting, concerns have increased that CPI inflation could get stuck materially above the 2% target.”
That said, the BOC toned down its previous statement about being “prepared to raise the policy rate further if needed to return inflation to the 2% target,” suggesting that this may be a one-and-done situation. Markets are still pricing in about a 50/50 chance of another interest rate increase at the BOC’s next meeting on July 12, when Governor Macklem and company will release updated economic forecasts as well.
From a technical perspective, USD/CAD has fallen right to a logical area of support in the wake of the decision. As the chart above shows, USD/|CAD is currently testing rising trend line support in the 1.3325 area; this trend line has offered strong support for the pair on five previous occasions over the last seven months, and bulls will be eager to defend it again.
With the BOC hinting at a possible one-and-done scenario, a bounce from support is possible later this week, especially if oil prices fall. Meanwhile, if that support area gives way, the next area to watch will be around 1.3250, near the year-to-date lows and the lowest rate the pair has traded at since last September.
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