**USD/CAD Breakout Accelerates Amid Bank of Canada Rate Decision**
*By [Adapted from original article by Fawad Razaqzada, published on Seeking Alpha]*
The USD/CAD pair has continued its bullish run, surging toward new multi-month highs as momentum builds following the latest Bank of Canada policy announcement. With the BoC keeping its key interest rate unchanged at 5.0% in January and signaling a potential end to its tightening cycle, investors are recalibrating their expectations. Meanwhile, a hawkish Federal Reserve outlook is lending strong support to the US dollar. The result has been a breakout in the USD/CAD currency pair that could have longer-term implications.
This article takes a deep dive into the dynamics behind the strengthening USD/CAD trend, the impact of central bank policy divergence, and key technical levels traders should watch. Additional insights are incorporated from other credible sources to provide a comprehensive picture of the USD/CAD market landscape.
## Bank of Canada Holds Rates Steady
At its January policy meeting, the Bank of Canada (BoC) opted to keep its benchmark overnight interest rate at 5.00%, in line with consensus expectations. This marks the fourth consecutive meeting during which the central bank has left its rate unchanged.
Key takeaways from the BoC’s decision:
– The BoC stated that monetary policy is “restrictive” and continues to weigh on economic activity and price pressures.
– Policymakers acknowledged weakening household consumption and noted slower GDP growth, pointing to softening demand.
– Inflation remains the central focus, but the central bank expressed cautious optimism that inflation is receding, with headline CPI easing to 3.1% in December 2023 from a peak of 8.1% in mid-2022.
– The BoC no longer emphasized the need for further rate hikes, indicating a potential policy pivot in the coming months.
This decision, while not surprising, contrasts sharply with the tone and trajectory of US monetary policy.
## Divergence Between Federal Reserve and Bank of Canada
The policy gap between the Bank of Canada and the Federal Reserve is a central theme behind the recent move in USD/CAD. While the BoC appears to be nearing the end of its tightening cycle—or may already be done—the Fed is adopting a more assertive stance.
At its last policy meeting, the Fed kept the federal funds rate at 5.25% to 5.50%, but guidance from Chair Jerome Powell indicated inflation risks remain and that the Fed would proceed cautiously with rate cuts. Markets have begun to reassess the path of US interest rates. Earlier expectations for multiple rate cuts in early 2024 are now being pushed further into the year.
– **Fed’s December “dot plot”** showed three 25-bp rate cuts expected in 2024, but market pricing as of February 2024 has scaled back expectations from seven cuts to three or four.
– **US economic data** remains robust, with strong job growth, resilient consumer spending, and a tight labor market, all of which support a more hawkish Fed.
In contrast:
– The **BoC’s forward guidance** lacked the same degree of emphasis on further tightening.
– Canadian economic data highlights a slowing economy, including weak retail sales and a cooling housing market.
– Consumer confidence in Canada remains under pressure amid high household debt and rising delinquencies in credit card payments, something that the BoC itself has noted with concern.
As rate expectations diverge, capital flows are beginning to favor the US dollar over the Canadian dollar, contributing to USD/CAD strength.
## Technical Outlook: USD/CAD Breakout Accelerates
Technically, the USD/CAD broke through key resistance levels, paving the way for further gains in the pair.
### Key technical highlights:
– In early February, the pair surged past 1.3500, breaking out of a multi-week consolidation pattern.
– A rising channel is forming on the daily chart
Read more on USD/CAD trading.