• The Bank of Canada is expected to raise interest rates by 25 basis points to 2.50% on Wednesday.
• Canadian employment fell sharply in September, complicating the case for tighter monetary policy.
• Investors will scrutinize the central bank’s guidance for clues about further rate increases.

The Bank of Canada (BoC) is expected to raise its benchmark interest rate by 25 basis points to 2.50% on Wednesday, as persistent inflation concerns put pressure on policymakers to tighten monetary policy despite growing signs of economic weakness.

According to a Reuters poll, 19 of 34 economists anticipate a rate hike, which would mark the central bank’s first increase since July 2023. However, the decision remains uncertain as recent economic data highlight the challenges facing the Canadian economy.

Canada’s Consumer Price Index (CPI) rose 3.1% YoY in September, compared with 3% in August, mainly driven by higher energy prices. Underlying inflation measures, however, eased, suggesting that broader price pressures remain relatively contained. BoC Governor Tiff Macklem has warned that prolonged increases in Oil prices could eventually spread to other goods and services.

Meanwhile, the Canadian labor market deteriorated sharply in September. Employment declined by 68.3K jobs, far below expectations of a 7K increase, following a loss of 41.7K jobs in August. The Unemployment Rate rose to 6.5% from 6.4%, reinforcing concerns about weakening domestic demand.

These conflicting signals have divided economists. BBH and Scotiabank expect a quarter-point rate hike, while TD Securities anticipates that the BoC will wait until December. Standard Chartered also favors keeping rates unchanged, citing subdued underlying inflation and economic weakness.

Beyond Wednesday’s decision, investors will closely examine the BoC’s updated economic projections and Governor Macklem’s comments to assess whether policymakers are preparing for additional tightening or a more cautious approach.

When will the BoC release its monetary policy decision, and how could it affect USD/CAD?

The BoC will announce its monetary policy decision on Wednesday at 13:45 GMT, alongside its updated Monetary Policy Report. Governor Tiff Macklem’s subsequent press conference at 14:30 GMT will offer further insights into the central bank’s policy outlook.

A 25-basis-point rate hike accompanied by hawkish guidance could support the Canadian Dollar (CAD) and weigh on USD/CAD. Conversely, a hold rates decision or cautious guidance highlighting labor market weakness could undermine the Canadian Dollar and push USD/CAD higher.

In the four-hour chart, USD/CAD keeps a capped near-term tone as it holds just under the horizontal barrier at 1.4055 while remaining below the 200-period simple moving average (SMA) at 1.4108 and the 100-period SMA at 1.4153. The Relative Strength Index (14) at 54.9 has recovered into mildly positive territory, suggesting improving momentum, but price action is still constrained by these overhead averages, limiting upside follow-through for now.

On the topside, initial resistance is located at 1.4055, ahead of the 200-period SMA at 1.4108, with the 100-period SMA at 1.4153 and the nearby horizontal level at 1.4155 forming a broader supply zone higher up. On the downside, immediate support appears at 1.3969, with a deeper floor seen at 1.3910, and a break below this latter level would likely expose further bearish pressure in the short term.