The Reserve Bank of Australia surprised markets on Tuesday, when it unexpectedly raised its key interest rate by 0.25% to 4.1%, which put market players on edge ahead of the monetary policy decision of the Bank of Canada.
Historically, the Bank of Canada's decisions largely align with or depend on the actions of the Federal Reserve, as the Canadian economy is effectively integrated with the US economy. However, there could be a chance that the central bank will take similar steps to that of the RBA, as Canada's GDP grew by only 0.80%, and inflation hit 4.40%. The key interest rate also stands at 4.5%. In the US, GDP data rose by 1.30%, while inflation stands at 4.90%. The interest rate lies at 5.25%.
These data indicate that the Bank of Canada has room to raise rates, but it is not really necessary to do so. After all, inflation remains high but lower than in the US and Australia. The interest rate is also in a mid-range position, as is the GDP value. There is also no need to rush as the bank could wait for whether the Fed will raise interest rates at its June meeting.
The outcome of the Fed's meeting will have a more noticeable impact on the dynamics of the Canadian dollar than the Bank of Canada. Its appreciation or depreciation against the US dollar will also depend on movements in crude oil prices, which have been exhibiting a sideways trend within a narrow range since the end of last year.
If the Bank of Canada unexpectedly raises interest rates, there may be a slight increase in the value of the Canadian dollar, followed by a retreat, similar to what happened with the Australian dollar yesterday after the RBA's decision. However, if the rate is not raised, the USD/CAD pair will consolidate while awaiting the outcome of the Fed's meeting.
Forecasts for today:
USD/CAD:
The pair is consolidating above the support line at 1.3365, awaiting the outcome of the Bank of Canada's meeting on monetary policy. There is a huge chance that it will remain within this range until the end of the current week.
EUR/USD:
The pair is also moving within the range of 1.0635-1.0800, awaiting news from the Federal Reserve. It will also stay within this range until the end of the week.