Canadian central bank is widely expected to keep its interest rate at 5.0%.

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• Canadian central bank is widely expected to keep its interest rate at 5.0%.
• Bank of Canada officials could emphasize the stickiness of inflation.
• Canadian Dollar has been on the defensive so far this year.
• Investors’ attention should also remain on the BoC Monetary Policy Report.

It is widely anticipated that the Bank of Canada (BoC) will maintain its policy rate at 5.0% for the fourth consecutive time at its event on Wednesday, January 24. The Canadian Dollar (CAD) has been depreciating markedly since the beginning of the new year against its southern neighbour, the US Dollar (USD). So far this week, USD/CAD managed to regain some ground lost in the latter half of the last week, revisiting the 1.3480 zone, where the critical 200-day SMA also sits.

It will be the first meeting of the year and those who expect the central bank to drop its guard could be greatly disappointed, particularly since the release of Canada’s inflation figures in December, which saw consumer prices unexpectedly rise 3.4% over the last twelve months and the BoC’s Trimmed-CPI and Median-CPI maintain its firm stance.

While the central bank could revise lower its GDP forecasts, it should certainly keep its cautious stance well in place, therefore the likelihood of further rate hikes are expected to remain an option in case the disinflationary pressures continue to show signs of exhaustion.

According to BoC Governor Tiff Macklem, in the latest recap of discussions, the Governing Council emphasized the significance of restating their readiness to increase the rate if necessary. He added that fortunately, longer-term inflation expectations have remained securely anchored, although short-term expectations have escalated in tandem with inflation. Macklem also mentioned that by the conclusion of 2024, the bank should be approaching the 2% inflation target.

The Bank of Canada is set to disclose its policy decision at 15:00 GMT on January 24, followed by the publication of the bank’s Monetary Policy Report (MPR).

The anticipated impact on the Canadian currency is expected to be limited if any at all. A hawkish hold could prompt a near-term knee-jerk drop in USD/CAD, although its duration and extension are unlikely to be convincing. Of note is that much of the so-far yearly uptrend in spot is attributed to the dynamics of the USD. The pair, in the meantime, continues to navigate around the 200-day SMA near 1.3480, and a sustained breakout of this zone should lend fresh wings to the pair and refocus its target to the December peaks around 1.3620.

On the flip side, there seems to be no strong catalysts in the very near term to allow for the Canadian Dollar to embark on a sustainable appreciation, which could eventually drag the pair to its initial contention zone at the December lows near 1.3180.

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