BoC interest rates expected to rise to 2.50%

• A 25-basis-point interest rate rise to 2.50% is expected from the Bank of Canada on Wednesday.
• September's steep fall in Canadian employment has made the case for monetary tightening less clear-cut.
• For indications of further rate rises, investors will look closely at the central bank's guidance.

A 25-basis-point increase in the benchmark interest rate to 2.50% is expected when the Bank of Canada (BoC) meets on Wednesday. Persistent concerns over inflation are pushing policymakers towards tighter monetary policy, even as evidence of economic weakness mounts.

Of the 34 economists surveyed by Reuters, 19 expect a rate rise, which would be the central bank's first since July 2023. Nevertheless, the outcome is far from assured, with the latest economic releases underscoring the difficulties confronting Canada's economy.

Higher energy prices were the main driver as Canada's Consumer Price Index (CPI) increased by 3.1% YoY in September, up from 3% in August. Measures of underlying inflation softened, however, indicating that price pressures across the wider economy remain relatively contained. According to a warning from BoC Governor Tiff Macklem, sustained rises in oil prices could ultimately feed through to other goods and services.

September also brought a marked deterioration in Canada's labour market: employment fell by 68.3K jobs against an expected 7K increase, after 41.7K jobs were lost in August. With the unemployment rate climbing from 6.4% to 6.5%, concerns over weakening domestic demand have intensified.

Economists remain split in the face of these contrasting signals. While BBH and Scotiabank forecast a quarter-point increase, TD Securities expects the BoC to delay a move until December. Weak economic conditions and subdued underlying inflation also lead Standard Chartered to favour leaving rates on hold.

To judge whether further tightening or a more cautious stance lies ahead, investors will look beyond Wednesday's rate decision to the BoC's revised economic forecasts and Governor Macklem's remarks.

BoC policy announcement puts USD/CAD in focus

Wednesday's monetary policy announcement is due at 13:45 GMT, when the BoC will also publish its updated Monetary Policy Report. Further indications of the central bank's policy outlook will follow at Governor Tiff Macklem's press conference at 14:30 GMT.

If a 25-basis-point increase comes with hawkish guidance, the Canadian dollar (CAD) could strengthen, putting USD/CAD under pressure. By contrast, leaving rates unchanged or issuing cautious guidance that emphasises labour market weakness could weigh on the Canadian dollar and lift USD/CAD.

Trading just beneath the horizontal barrier at 1.4055, USD/CAD remains constrained in the near term on the four-hour chart. The pair is also below both the 200-period simple moving average (SMA) at 1.4108 and the 100-period SMA at 1.4153. Although the Relative Strength Index (14) has recovered to 54.9, a mildly positive reading that points to improving momentum, those overhead moving averages continue to restrict price action and limit further gains for now.

Any advance would first encounter resistance at 1.4055, followed by the 200-period SMA at 1.4108. Higher up, the 100-period SMA at 1.4153 and the adjacent horizontal level at 1.4155 together define a broader supply zone. For a move lower, the nearest support lies at 1.3969, ahead of a more distant floor at 1.3910. A breach of the latter would probably leave the pair vulnerable to additional short-term selling pressure.

(The technical analysis of this story was written with the help of an AI tool. Know more.)