USD/CAD Price Outlook: Canadian Dollar Hinges on BoC Decision

• The Canadian Dollar faces high-impact event risk with the BoC rate decision due

• USD/CAD price action could pivot lower if the Bank of Canada tapers QE further

• Language on the output gap, rate hike guidance might also weigh on the Loonie

The Canadian Dollar traded mixed against key FX peers during Tuesdays session. Loonie strength was seen relative to the Euro with EUR/CAD shedding 33-pips on the day. This likely tracked the rise in crude oil prices. Canadian Dollar weakness versus the US Dollar offset this, however, as USD/CAD price action ripped 61-pips higher in the wake of red-hot inflation data.

Looking ahead to Wednesdays trading session, we could get better clarity in the monetary policy update expected from the Bank of Canada for where the Loonie might move next. High-impact event risk posed by the upcoming BoC rate decision due 14 July at 14:00 GMT is reflected by still elevated implied volatility readings for USD/CAD.

As previously noted in my weekly Canadian Dollar forecast, the upcoming Bank of Canada rate decision will be towards the top of my radar this week with the BoC poised to further taper its asset purchase program. Slowing QE by more than $1-billion from the current pace of $3-billion could see a bullish reaction by the Canadian Dollar. So too could bringing forward expectations for the liftoff of interest rates.

As things stand, markets are currently pricing in four 0.25% rate hikes from the Bank of Canada over the next two years with the first expected before the end of 2022. On the other hand, tapering its asset purchase program by less than $1-billion might disappoint BoC hawks and Canadian Dollar bulls. Cautious outlook from the Bank of Canada, perhaps justified by economic activity undershooting projections provided in April, could similarly spark broad-based Canadian Dollar selling pressure.