USD CAD in focus ahead of Bank of Canada decision

The US dollar attempted to rebound on Tuesday, but bearish sentiment and heavy pressure on the greenback have remained after the sharp plunge that occurred late last week and into the beginning of this week. US dollar weakness was a key theme throughout much of last year, and has continued to prevail into January, pushing the US dollar index to a new 3-year low as of Friday, and the EUR/USD to a new 3-year high. This recent pronounced weakness for the US dollar has also helped lead to a resumed fall for USD/CAD down to a key support area around 1.2400.

Looking ahead to Wednesday, the Canadian dollar will likely take center stage once again as the Bank of Canada issues its latest interest rate decision, monetary policy report, and press conference. Current consensus expectations point to another potential interest rate hike by the BoC – to 1.25% – after the central bank last raised rates back-to-back in July and September of last year. If the BoC indeed raises rates as expected, the Canadian dollar could receive another boost against the beleaguered US dollar, potentially pressuring USD/CAD even more.

Earlier, in the first week of the new year, key employment reports from the US and Canada showed a stark contrast that weighed further on USD/CAD. US headline employment for December fell significantly short of expectations while Canada’s job creation far exceeded forecasts.

As noted, USD/CAD currently sits just above key support around the 1.2400 level, and continues to trade within a bearish trend on both longer-term and shorter-term time frames. Any sharp and sustained breakdown below 1.2400 amid further US dollar weakness or a hawkish decision from the Bank of Canada on Wednesday could prompt a resumption of the bearish trend and continued slide for USD/CAD down towards the next key support target around the 1.2200 level.

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