Loonie Declines After 50bps Rate Hike

Loonie Declines After 50bps Rate Hike
Despite some bullish news, the Canadian dollar failed to build positive momentum today. Instead, it traded near its intraday lows, with the USDCAD pair hovering at around 1.2670, trading 0.2% higher on the day.

Bank of Canada sounds hawkish

Earlier today, the Bank of Canada raised the overnight rate by 50 basis points to 1.50%, as expected, and issued a hawkish statement that raised concerns about inflation pressures intensifying and entrenching at elevated levels. 

Specifically, the Governing Council stated that it is prepared to act "more forcefully if necessary" to meet its commitment to achieving the 2% inflation target.

Inflation is growing faster than expected in April, according to policymakers, and "will likely rise much higher in the short term before beginning to reduce."

While the 50 basis point increase was expected, Bloomberg reports that the wording would fuel suspicion that policymakers led by Governor Tiff Macklem are considering tightening at a quicker rate than previously suggested. 

Markets are currently pricing in another half-point hike at the July 13 meeting before the Fed slows its tightening pace in the second half of the year. After that, the central bank is expected to come to a halt at the 3% target.

Bullish reversal soon?

Today's price action could lead to a further upside momentum, thus reversing the bearish trend from the previous days. In addition, the USDCAD pair returned above the 200-day moving average (the purple line) at 1.2660, likely changing the short-term direction to bullish.

The next resistance could be at previous lows in the 1.2720 area (the red horizontal line)

On the downside, should the pair start dropping again, we could see a decline toward today's lows near 1.26.
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