01.06.202213:25 Forex Analysis & Reviews: USD/CAD: Bank of Canada meeting expected

According to Statistics Canada, March GDP rose by 0.7% month-over-month, above preliminary estimates of a 0.5% expansion and following a downwardly revised 0.9% growth rate in February. The economy grew at an annualized rate of 3.1% in the first quarter. The result was down from an annualized rate of 6.6% in the fourth quarter of 2021 and a growth forecast of 5.4%.

The GDP report stands out from the rather strong macroeconomic data. For instance, the number of job vacancies in Canada hit a record high last month. The unemployment rate dropped to a record low of 5.2% (down from 8.2% a year ago), while wages rose at the fastest rate in 40 years.

However, annual consumer inflation in Canada was 6.8%, a 31-year high. Although this value is still lower than, for example, in the US and the Eurozone, where annual inflation is well above the 8% target. Core inflation, which excludes volatile goods such as food and energy, has also accelerated in Canada, to nearly 4%. Inflation in Canada is soaring, and current CPI indices are well above central bank forecasts and the 2% inflation target. The Bank of Canada will have capacity to raise interest rates as long as inflation remains high, unemployment is low and economic growth continues, economists say.

It is widely expected that the Bank of Canada management will now decide at today's meeting to raise the interest rate, presumably to 1.5% from the current level of 1%. Economists believe that the Bank of Canada has significant room for manoeuvre in raising the interest rate. Bank of Canada Governor Tiff Macklem said in late April that the central bank's management would be discussing a rate hike of another half a percentage point on June 1. His deputy Toni Gravelle in April classified the current rate level as "too stimulative", noting that the economy is in good enough shape to withstand a borrowing cost increase. Macklem noted that the central bank was seeking to raise the rate to a neutral level where it neither stimulates nor slows down economic activity. The Bank of Canada estimates the neutral level at 2% to 3%.

An interest rate hike is a positive sign for the Canadian dollar, as it is also receiving support from the continuing rise in oil prices. Canada is known to be the largest exporter of oil and petroleum products, ranking 4th in the world in terms of oil production. However, mineral fuels and petroleum products account for about 22% of the country's total exports.

Notably, the Bank of Canada's interest rate decision will be published today. In an accompanying statement, Bank of Canada governors will explain the decision and announce the bank's future plans. The harsh tone of the accompanying statement regarding rising inflation and the prospect of further monetary policy tightening will cause the Canadian dollar to strengthen. If the Bank of Canada signals a pause or that monetary policy should be soft, the Canadian currency will decline.

USD/CAD is trading near 1.2640, close to today's opening price. The pair is likely to remain in a range close to current levels until the Bank of Canada's interest rate decision is published. There are 100 pips to the key long-term support level of 1.2540, which separates the long-term bullish market from the bearish one. Given the average daily volatility of a pair of 100-130 pips, the price can get there in one day.