BoC Expected to Hold Rates as Sticky Inflation Stays

• The BoC is likely to hold overnight rates at the January meeting.
• Minutes from the last meeting suggest the disinflationary process is on track.
• The bank’s message will likely determine the USD/CAD path.

The Bank of Canada is likely to remain on hold for its first interest rate decision of the year on January 24. Officials continue to talk about their readiness to "raise the policy rate further if necessary," while inflation remains higher than the BoC would like.

Sticky Inflation

Following three months of dropping or unchanged prices compared to a year earlier, headline inflation increased to 3.4% in December from 3.1%, and the widely monitored core inflation figures also remained high.

Last month, Governor Tiff Macklem stated that he wanted to be satisfied that inflation was on a "sustained downward track" before lowering rates. He added that inflation should be "getting close to" 2% by the end of 2024 and that the bank might begin decreasing rates before inflation returns to goal, given that monetary policy moves have a lag.

So far, policymakers have stated that if inflation continues to rise, interest rates will be raised further. However, economists have mostly disregarded the likelihood. Minutes from the bank's December meeting show that most members feel borrowing rates are sufficiently high to bring inflation back on track over time.

Given this backdrop, markets foresee a 25-basis-point decrease by June, but expectations for a similar cut in April have plummeted to 70% from 100% before the December inflation figures.

Less Favorable Business Conditions

The latest BoC Business Outlook Survey indicated decreasing demand and less favorable business conditions in the fourth quarter, with high interest rates weighing on enterprises.

Job growth appears to be slowing, and the Canadian economy declined in the fourth quarter.

What do they say?

Many analysts predict that inflation in Canada is going to stay stickier than in the US, and the BoC will be behind the Federal Reserve when it comes to the first-rate decrease this year.

Experts predict the Bank of Canada will retain its benchmark overnight rate at 5% at the January meeting, with little likelihood of further policy tightening from here.

Instead, the next step is expected to be a rate decrease, most likely at the April meeting.

However, there can be a hawkish bias on Wednesday. This is because the sticky inflation isn’t acting like the BoC wants, as mentioned above.

So far in 2024, the USD/CAD bulls have enjoyed their time. This is on the back of a more hawkish Fed than the BoC. Also, the greenback’s seasonality factor is playing a part.

If the overnight rate comes in consensus with the forecast, the markets may see this as a dovish stance, and the USD/CAD bulls may continue to grind higher. On the other hand, if there is some hawkish rhetoric from the BoC, expect CAD to jump higher against the USD.

USD/CAD Technical Forecast: Upside Potential?

USD/CAD is trading above the 20-day MA. On the downside, the pair has support at 1.33721. A fall below that level can bring the pair towards 1.33000.

On the upside, the pair can reach the next resistance level at 1.35411. A break over that level will pave the way for 1.36000.