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Most Read: Euro Weekly Forecast – EUR/USD, EUR/GBP Await ECB. Breakout or Breakdown Ahead?
The Bank of Canada will announce its October monetary policy decision on Wednesday. The institution headed by Tiff Macklem is expected to keep its benchmark interest rates unchanged at a 22-year high of 5.0%, keeping borrowing costs stable for the second consecutive month, in line with recent guidance offered by top officials.
In terms of forward guidance, the central bank may leave the door open to additional policy firming as part of a strategy to maintain credibility in the fight against inflation, but may show less conviction in the need for a more aggressive approach given deteriorating economic conditions.
Back in September, when the BoC decided to stand pat, it warned that the country’s economy had entered a period of weaker growth amid a marked decline in consumption and housing production. Preliminary data for the third quarter have confirmed this assessment, with GDP stagnating in July and only seeing a paltry uptick in August.
In light of the rapid slowdown in activity and softening consumer prices, which currently stand at 3.8% year-on-year, the central bank will come under increased pressure to embrace a more cautious and less hawkish stance. This could involve the adoption of a more balanced communication strategy going forward to prevent spooking markets.
Any indication that policymakers will prioritize growth over inflation will be negative for the Canadian dollar, reinforcing the U.S. dollar’s bullish momentum in the near term. With the Loonie biased to the downside, it may only be a matter of time before USD/CAD manages to recapture or even surpass its 2023 highs.
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USD/CAD TECHNICAL ANALYSIS
After Tuesday’s rally, USD/CAD broke above the 1.3700 handle and managed to inch closer to its October peak near 1.3785 – the next critical technical resistance to keep an eye on. The ability of buyers to breach this ceiling remains uncertain, but a successful breakthrough could signal a potential move towards 2023’s high at 1.3860. On further strength, the focus shifts higher to last year’s peak at 1.3975.
On the flip side, if sellers regain control of the market and trigger a bearish reversal, initial support rests around the 1.3700 level. Successfully breaching this floor could rekindle downward impetus, setting the stage for a pullback toward the 50-day moving average, nestled around 1.3575.
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