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USD/CAD: Against the backdrop of the July meetings of the Bank of Canada and the Fed

12 July 2023, 14:11

Yuri Papshev

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Economists expect another slowdown in inflation in the US: the general annual consumer price index CPI from 4.0% to 3.1%, and the base (Core CPI) - up to 5.0% from 5.3% a month earlier. Many economists believe that by the end of the year or at the beginning of the next, the Fed will completely move on to easing monetary policy.

If the US inflation data still turns out to be stronger than the forecast values, and especially higher than the previous ones, then we should expect a serious rebound and a stronger dollar.

Conversely, confirmation of the forecast and weaker values of CPI and Core CPI than forecast will cause further weakening.

Especially strongly (after the publication of inflation data from the US) volatility will rise again at 14:00 (GMT), when the Central Bank of Canada will publish its decision on the interest rate.

Economists are sure that the Bank of Canada will raise the interest rate today by 0.25% to 5.00% amid fears about the resumption of growth in consumer inflation, although, in June, it, contrary to forecasts, decreased.

Market participants are still not 100% sure about the reality of today's interest rate hike by the Bank of Canada, given the clear trend towards a slowdown in inflation, and even more so they do not know what will happen next.

If the Bank of Canada takes a pause in interest rate hikes today and makes vague statements about the prospects for its monetary policy, confining itself to asserting its commitment to price stability, then we should expect a significant weakening of the Canadian dollar.

At the moment, USD/CAD has reached 1.3220. In case of a further decline and a breakdown of the key support level 1.3080, we can talk about the transition of USD/CAD to the zone of a long-term bear market as well (for more details and an alternative scenario, see USD/CAD: dynamics scenarios for 07/12/2023).

However, the vector of dynamics of the USD/CAD pair may reverse again if, following the results of the July meetings, the Fed's interest rate is raised, and the interest rate of the Bank of Canada remains at the same level.

The signal for new sales is a breakdown of the local and intraday lows at 1.3200.

In an alternative scenario, and after the breakdown of the important short-term resistance level of 1.3262, USD/CAD will resume growth towards the key medium-term resistance levels of 1.3345, 1.3380, 1.3410. The breakdown of the resistance level at 1.3450 (Fibonacci 23.6% correction in the previous wave of growth from the level of 0.9700 to the level of 1.4600, reached in January 2016) will again bring USD/CAD into the medium-term bull market zone and resume the positive dynamics of the pair within the long-term and global bull market markets.

Support levels: 1.3200, 1.3140, 1.3100, 1.3080, 1.3000, 1.2740, 1.2650

Resistance levels: 1.3262, 1.3315, 1.3345, 1.3380, 1.3410, 1.3450, 1.3600, 1.3665, 1.3700, 1.3810, 1.3860, 1.3900, 1.3970, 1.4000