Bank of Canada’s interest rate decision next up

The greenback strengthened significantly against its counterparts yesterday, supercharged by Fed Chair Powell’s hawkish remarks which hinted that a hike of a larger magnitude may be preferred in the March meeting. Bank of Canada’s interest rate decision is the main event for the day and CAD traders are expected to tune in, awaiting for the confirmation that the bank would pause its tightening cycle and keep its key policy rate steady at 4.5%. BOC Governor Macklem explicitly stated that the central bank will adopt a wait and see position to observe the cumulative effect of its tightening efforts during last month’s decision. Currently according to the latest CAD OIS data, the market places a 85% probability in the scenario where BOC stays on hold and should that be the case, we may see the Loonie weaken or at the very least remain negatively predisposed against any of its counterparts moves. Evidently, yesterday the Loonie traded near 4-month lows against the dollar and the move highlights the ongoing risk that further devaluation may follow, as other banks press on with further tightening. Fed Chair Powell during his testimony in front of the Senate Banking Committee addressed a barrage of questions spanning from monetary policy to economic theory and politics. The Chair cautioned that interest rates are likely to head higher than what central bank policymakers had expected, given January’s strong employment results alongside the hotter than anticipated PCE data, emphasizing specifically on the core aspect of the results, which was evidently stickier than expectations. Given that the Fed has a dual mandate, ensuring price stability and facilitate favorable employment market conditions, the central bank seeks to restore the former since the later remains resilient. Overall, as the bank acknowledged that it is still far away from its goal and a higher terminal rate is now a reality, the markets rushed reassess their outlooks and a shift in projections took place in the swaps markets. Money markets started to reprice the probabilities that the Fed may pursue a 50 basis points hike rather than the 25 bps that was initially expected in the March meeting. The FFF prior to the release implied a 77% probability for a 25 basis points hike scenario, whereas currently the 50-basis points scenario amasses a 64% probability. Moreover, money markets are pricing in a higher terminal rate also above the 5.25-5.5% range with an overwhelming majority betting that a 5.5-5.75% level will be reached at June’s meeting. Bond yields surged sharply higher yesterday with the 2-year yield hitting year-to-date highs, just shy on 5%. The benchmark 10-year treasury yield has also climbed higher, above the 4% once again, approaching a three-month high. The overall picture drawn from the steepening of the inverted yield curve signals that the markets foresee the probability for a recession in the short-term rise.

AUD/USD fell sharply as the dollar perked up. We hold a bearish bias for pair, yet we note a correction may be due as RSI fell below the 30 oversold threshold. Should the bears reign, we may see the break below 0.6580 (S1) and the move towards 0.6530 (S2). Should bulls take over, we may see break above 0.6640 (R1) and the move towards 0.6700 (R2)

USD/CAD soared higher and broke past previous resistance levels, We hold a bullish bias yet we note the possibility for the move correcting lower since the RSI broke past the 70 overbought threshold. Should the bulls reign, we may see the break of 1.3760 (R1) level and the move closer to 1.3820 (R2) level. Should the bears take over, we may see the break below 1.3700 (S1) and the move near 1.3644 (S2) level.

Other highlights for the day:

Today we note the release of JOLTS job openings and ADP employment reports, Fed Chair Powell’s speech, Eurozone’s revised GPD for Q4 and in tomorrow’s early Asian session we note, Japan’s Q4 GDP rate, and both PPI and CPI releases from China.

USD/CAD H4 Chart

Support: 1.3700 (S1), 1.3644 (S2), 1.3580 (S3)

Resistance: 1.3760 (R1), 1.3820 (R2), 1.3880 (R3)

AUD/USD H4 Chart

Support: 0.6580 (S1), 0.6530 (S2), 0.6480 (S3)

Resistance: 0.6640 (R1), 0.6700 (R2), 0.6770 (R3)

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