Canada Interest Rate Decision Preview: Bank of Canada eyes another rate cut on easing inflation expectation

• The interest rate in Canada is set to be lowered by 25 bps to 4.50% on Wednesday.
• The Bank of Canada Governor Macklem’s words will be closely scrutinized for further policy cues.
• The Canadian Dollar is primed for a big reaction to the BoC policy announcements.

The Bank of Canada (BoC) is widely anticipated to lower its key interest rate by 25 basis points (bps) from 4.75% to 4.50% at its monetary policy meeting on Wednesday, July 24. The Canadian Dollar (CAD) is primed for a big volatility spike in reaction to the BoC policy announcements.

Bank of Canada set for another interest rate cut

The Canadian central bank is seen cutting rates for the second consecutive meeting and the decision will be announced at 13:45 GMT. Governor Tiff Macklem’s press conference will follow at 14:30 GMT.

In June, the BoC delivered its first interest-rate cut since a series of hikes that began in March 2022, slashing rates by 25 bps from 5.0% to 4.75%, as the central bank felt confident that inflation will continue to move towards the 2% target.

Governor Tiff Macklem mentioned that it is reasonable to expect more rate cuts if inflation continues to ease. 

Since then, inflation in Canada slowed down further, with the headline annual Consumer Price Index (CPI) rising 2.7% in June, cooler than the BoC's 2.9% inflation forecast for the end of the first half of 2024.

“Month-over-month, the consumer price index was down 0.1%, compared with a forecast for no change. Statistics Canada data showed this was the first deceleration in the monthly inflation rate since December,” according to Reuters.

Loosening Canadian labor market conditions also cemented the case for another rate cut in July. The country lost 1,400 jobs in June while the Unemployment Rate rose to 6.4%, Statistics Canada reported earlier this month.

Markets are currently pricing in a 92% probability of a rate cut this week, with another cut also on the table later this year.

How will the BoC monetary policy decision affect USD/CAD?

As the rate cut is fully baked in, markets will closely scrutinize the language in the policy statement and Governor Macklem’s words for the bank’s next interest rate move. At the presser following the June policy meeting, BoC Governor Tiff Macklem said that “the timing of any further cuts will depend on data.”

Amidst sticky core inflation, it remains to be seen if the BoC adopts a prudent approach while hinting at the policy outlook in the coming months. In case the BoC cautions on the inflation outlook, the Canadian Dollar could receive a much-needed respite, as it would imply that the central bank could rein in its easing cycle.

If the bank acknowledges progress in disinflation and intends to lower rates further, the CAD may see an extension of the ongoing downtrend in the near future.

Dhwani Mehta, Asian Session Lead Analyst at FXStreet, offers key technicals for trading USD/CAD on the policy outcome.

"The USD/CAD pair is sitting at the highest level in six weeks at 1.3775 in the lead-up to the BoC showdown. Buyers appear to be biding time before the next leg higher, as the 14-day Relative Strength Index (RSI) stays firm above the 50 level while a Bull Cross remains in the making. The 21-day Simple Moving Average (SMA) is on the verge of crossing the 50-day SMA for the upside, which if realized daily closing basis will validate a bullish crossover.”

"On a renewed upside, USD/CAD could initiate a fresh advance toward the 2024 highs of 1.3846. Ahead of that, the 1.3800 barrier needs to be taken out decisively. The next target for buyers is aligned at the 1.3900 round level. Conversely, strong support is seen at around 1.3680, where the 21-day and 50-day SMA converge. Acceptance below that level will put the 100-day SMA of 1.3630 to the test. The last line of defense for USD/CAD optimists is at the 200-day SMA of 1.3595,” Dhwani adds.