USD/CAD: Rebounding as Traders Defy BOC Rate Hike Expectations

Highlights

• USD/CAD recovers from knee-jerk reaction to disappointing US job data.
• Bank of Canada set for second consecutive interest rate hike.
• Resilient Canadian economy and positive employment support rate increase.

Overview

The USD/CAD staged a recovery on Monday, bouncing back from a knee-jerk reaction to disappointing U.S. job data released on Friday. The greenback had weakened against the Loonie after U.S. nonfarm payrolls fell short of market expectations, indicating a slowdown in job gains. However, the report also hinted at strong wage growth, reinforcing market expectations for an upcoming rate hike from the Federal Reserve.

BOC Set for Second Consecutive Rate Hike

On the other side, the Bank of Canada (BoC) is poised to raise interest rates for the second consecutive time this quarter, following positive economic indicators. The central bank had already increased rates to a 22-year high of 4.75% in June, citing the need for less restrictive monetary policy. The decision on another rate hike will be announced on Wednesday, with analysts predicting a quarter-point increase.

Despite some recent signs of a slowdown, such as cooling inflation and a tepid May jobs report, the Canadian economy has remained resilient. The housing market has shown signs of recovery, and May’s economic growth is expected to rebound after a sluggish April. In fact, Canada added more jobs than anticipated in June, further strengthening the case for a rate hike.

While headline inflation has decreased significantly from last year’s peak, the core measures of inflation remain relatively stable. The BoC’s objective is not only to target a 2% inflation rate but also to balance borrowing costs to avoid negatively impacting the economy. Some market participants are even speculating on an additional rate hike by the end of the year.

Currently, interest rates in Canada are already at or above levels that would be considered normal in a typical rate hiking cycle. Going forward, any rate adjustments are likely to focus on fine-tuning policy and responding to the most recent economic data.

Short-Term Outlook

In summary, the USD/CAD has rebounded from its initial decline following the release of disappointing U.S. job data. The Bank of Canada is expected to raise interest rates for the second time in a row, driven by resilient economic growth and positive employment figures. While inflation has moderated, core measures remain steady, indicating the need for cautious adjustments to borrowing costs.

Technical Analysis

USD/CAD market sentiment is currently neutral with a slight bearish bias. The price is trading above the 50-4H moving average, indicating some support, but below the 200-4H moving average, suggesting a bearish undertone. The 14-4H RSI is near the neutral zone, reflecting a lack of strong momentum.

Traders should monitor price action near the main support area of 1.3204 to 1.3226 and the main resistance area of 1.3360 to 1.3384 for potential breakout or reversal signals. The market lacks clear direction at the moment, so caution is advised, but the focus should be on trader reaction to the 50-4H moving average at 1.3271.