07.09.202216:49 Forex Analysis & Reviews: Forecast for USD/CAD

"The person who's going to put this economy into recession is Vladimir Putin and not the MPC," Bank of England Governor Andrew Bailey said today during an inflation report hearing at the UK government's parliamentary Treasury Committee.

"Short-term inflation expectations have risen significantly, which is not surprising... and the UK is heavily dependent on gas prices," Bailey also said, adding that "you need to be very alert to rising medium- and long-term inflation expectations."

This is understandable—all over the world, including in its most economically developed part, inflation has reached the levels of 40 years ago and continues to grow. And one of the most important tools in the fight against it is the central banks' monetary policy.

In this regard, the key event of tomorrow will be the ECB meeting and its decision on the interest rate at 12:15 (GMT). ECB interest rates are assumed to be raised by 0.50%. However, some economists believe that euro buyers expect the ECB to raise the rate by 75 basis points. This is a bullish factor for the euro. However, in the current conditions, this may not be enough to contain the fall of the euro and the growth of inflation in the Eurozone. If the ECB does not meet the optimistic expectations of the market and conducts another rate hike by 50 basis points, this may strengthen the weakness of the euro in the near future, economists say.

Today, the key event will be the publication (at 14:00 GMT) of the decision of the Bank of Canada on the interest rate. Here, too, there may be surprises, although the Bank of Canada is widely assumed to raise its interest rate by 0.75% to 3.25%.

Despite this, the Canadian dollar looks vulnerable, like other major commodity currencies, in particular, against the backdrop of falling oil prices and the decline in major global stock indices.

The Canadian dollar is currently "going through a difficult period," economists say, and any support from the Bank of Canada today could quickly fade. They are counting on tough comments from Bank of Canada executives regarding future aggressive rate hikes. This "increases the growth potential for the loonie in the short term."

For the Canadian dollar to recover, it needs "markets to raise their expectations for peak rates from the current 3.8% to 4%+." However, this path has its downsides. Canada's Q2 GDP rose +3.3% year on year, Statistics Canada data released last week showed. The figure followed a 3.1% rise in the first quarter and fell short of market expectations of 4.5%. On a quarterly basis, real GDP grew by 0.8%.

At the same time, business activity in the manufacturing sector of Canada declined in August, and the S&P Global PMI fell to 48.7 from 52.5 in July. The reading was well below market expectations of 53.6 and fell below 50, which separates growth from slowdown in business activity. Moreover, "output and new orders fell at a faster pace, and employment fell for the first time since the start of the pandemic in two years," S&P Global Market Intelligence noted.

In other words, the Bank of Canada should act carefully, tightening monetary policy, so as not to harm the country's economy.

If the Bank of Canada raises the rate today not by 0.75% but by 0.50%, then the fall of the Canadian dollar is likely to be even more pronounced, economists say.

As of writing, the USD/CAD pair is trading near 1.3165, trying to develop an upward momentum, while remaining in the bull market zone, above the key support levels 1.2805, 1.2845.