CAD on guard even as Bank of Canada holds

The Bank of Canada (BoC) is expected to keep rates unchanged at 5% in its policy decision due later today (Wednesday, Oct 25).

This was a 50/50 call only a few weeks ago, but the recent soft inflation data has cut the odds of a 25bps rate hike to below 20%.

The growth outlook is clouded as GDP surprisingly contracted in the second quarter and flatlined in July. There are also concerns that higher rates will heap pressure on household mortgage costs.

That said, the labour market remains strong, with jobs being added in Aug and September, while the jobless rate remained low.

That means the BoC may keep the option of a future hike on the table, with Governor Macklem stressing the importance of wage growth and inflation expectations.

The Canadian dollar, a.k.a. "loonie", has struggled recently and may well continue to do so if the central bank meeting today doesn’t keep the mildly hawkish narrative going.

The broader uptrend in USD/CAD remains intact with previous selling around 1.37 easing.

The October high at 1.37853 is now the immediate target for buyers with the year-to-date March top at 1.38618.

Support sits around 1.3650 which has capped the upside a few times this year so could act as support.

USDInd buffered by "US exceptionalism"

The dollar reversed all of its losses from Monday as economic data once again highlighted the yawning growth gap between the US and other major regions around the globe.

The rebound came on the back of hot US survey PMI figures with both manufacturing and services sectors rising in spite of higher rates and oil prices.

There is not much on the US calendar today, with attention moving to tomorrow’s GDP and inflation data on Friday.

The DXY bounced off support from the mid-October lows and some Fib levels.

The minor retracement level (23.6%) of the July rally sits at 105.516. The major Fib level (38.2%) of the October 2022 decline is 105.38.

The strong reaction to this support zone could see the index move higher with 106.78 and the 107.371 highs from early October in view if the data continues to remain strong.