USD/CAD poised to break through despite the BoC’s hawkish stance

The USD/CAD pair increases as rising US Treasury yields result from positive economic data in the United States. Although the Bank of Canada maintained interest rates steady, it cautions that further increases should not be ruled out. Despite the BoC’s aggressive stance, the US dollar dominates the foreign exchange market, which undermines the Canadian currency.

The broader US dollar maintained a bullish bias as a result of extraordinarily solid US economic data, which led to a little softening of the Canadian dollar on Wednesday despite the Bank of Canada’s hawkish stance. The USD/CAD currency pair was up slightly to 1.3657 in late afternoon New York trade, probing a major resistance area and trading at its highest levels since late March.

The FOMC is more likely to deliver additional tightening this year and maintain a restrictive stance for an extended period in order to ensure a sustained convergence of inflation towards the 2.0% target as a result of better-than-expected US service sector activity data that increased US Treasury yields across most maturities. The events that followed produced a favourable climate for the dollar.

The Canadian dollar struggled in the face of riskier currencies on the market and ignored the BoC’s monetary policy pronouncement. To put things in perspective, the organisation headed by Governor Tiff Macklem kept interest rates at 5.0% but left the door open to the prospect of further policy firming given the lack of momentum in underlying inflation’s downward trend.

Markets remained unconvinced despite the BoC’s messaging suggesting that more rate hikes are conceivable due to impending economic challenges. The central bank acknowledged the present challenges and said that the economy has entered a phase of slower growth, which has coincided with a decrease in consumption and housing activity. In light of this, dealers did not feel the need to increase the bank’s terminal rate.

Looking ahead, the relative strength of the US economy compared to that of Canada, along with the Fed’s better position to implement additional policy tightening, may allow USD/CAD to move higher still. This is especially true if market volatility increases and risk aversion gains traction. In the near future, this could result in new multi-month highs for the pair.

On Wednesday, the pair continued to rise, marking the fourth straight day of gains, but it ran into resistance near the price of 1.3665 and found it difficult to break through it. Although there has been some early hesitancy, the pair is still in a strong position to break through this resistance at any time, with the psychological level of 1.3700 appearing as a potential target in the case of a bullish breakthrough. Moving up, the important ceiling for 2023 is found at 1.3850, close to the peak.

Conversely, if USD/CAD goes lower and is rejected from current levels, the first technical support to watch is at 1.3540, followed by 1.3500. The subsequent important floor is located at the 200-day simple moving average further down the line.