USD/CAD on Cusp of Breakout Despite BoC’s Hawkish Hold

USD/CAD FORECAST

• USD/CAD rises as U.S. Treasury yields push higher following strong U.S. economic data
• Bank of Canada keeps interest rates unchanged, but says additional hikes should not be ruled out
• BoC’s hawkish hold fails to support the Canadian dollar, as the broader U.S. dollar drives FX market dynamics

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The Canadian dollar was a touch softer on Wednesday despite Bank of Canada’s hawkish hold, as the broader U.S. dollar retained a positive bias following remarkably strong U.S. economic numbers. In late afternoon trading in New York, USD/CAD was up about 0.17% to 1.3657, probing a key resistance zone and hovering around its best levels since late March.

Better-than-expected U.S. service sector activity data boosted U.S. Treasury yields across most maturities, increasing the likelihood that the FOMC will deliver additional tightening this year and maintain a restrictive stance for an extended period to ensure a sustained convergence of inflation towards the 2.0% target. This sequence of events created a supportive environment for the greenback.

With riskier currencies on offer, the Canadian dollar struggled, shrugging off BoC’s monetary policy announcement. By way of context, the institution led by Governor Tiff Macklem held interest rates steady at 5.0%, but left the door ajar to the possibility of more policy firming in light of little downward momentum in underlying inflation.

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While the BoC’s message indicates future rate hikes are possible, markets remained skeptical amid looming economic headwinds. The central bank acknowledged the current difficulties, noting that the economy has entered a period of weaker growth, coinciding with a decline in consumption and housing activity. Against this backdrop, traders saw little need to reprice higher the bank’s terminal rate.

Looking ahead, the relative strength of the U.S. economy compared to its Canadian counterpart, along with the Fed’s more favorable position to implement further policy tightening, could provide USD/CAD with room for further upward movement, particularly if market volatility picks up and risk aversion takes hold. This could mean fresh multi-month highs for the pair in the near term.

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USD/CAD TECHNICAL ANALYSIS

USD/CAD continued its upward trajectory, marking the fourth consecutive day of gains on Wednesday, but it encountered resistance in the 1.3665 region, struggling to push past it decisively. Despite this initial hesitation, the pair remains well-positioned to breach this barrier at any moment, with the 1.3700 psychological level emerging as an area of interest in the event of a bullish breakout. Moving higher, the next critical ceiling is located at 1.3850, near the 2023 peak.

On the flip side, if USD/CAD gets rejected from current levels and shifts downward, the first technical support to keep an eye on rests at 1.3540, followed by 1.3500. Further down the line, the next relevant floor is situated in the vicinity of the 200-day simple moving average.

USD/CAD TECHNICAL CHART

USD/CAD Chart Created Using TradingView