Markets are awaiting the Bank of Canada's announcement on monetary policy decisions today, and it is expected that the interest rate will be raised by about 0.50% from 1.00% to 1.50%. Currently, the markets are pricing in an additional 0.50% interest rate hike by the bank during July, reaching 2% compared to 0.25% at the beginning of this year.

The pace of monetary tightening by the Bank of Canada comes amid the continued acceleration of inflation in Canada, which reached 6.8%, the fastest pace in thirty years. Wage growth also rose above 3%, highlighting the significant gap between inflation and wages, and thus the necessity to continue raising interest rates this year.

The Bank of Canada may raise interest rates by about 0.25% during the meetings following the July meeting to control the current inflation.

It is noteworthy that the performance of the Canadian dollar has outperformed other commodity currencies this year, and high oil prices may be a key factor in this strong performance.

On the other hand, the U.S. Federal Reserve is heading towards raising the interest rate by about 0.50% during its mid-June meeting from 1.0% to 1.50% as well, to control the highest inflation rise in 40 years, which may limit the gains of the Canadian dollar against its U.S. counterpart.

The Canadian dollar may record strong gains against competing commodity currencies such as the Australian dollar and the New Zealand dollar.

Technical outlook and trading opportunities for the USD/CAD pair

On the daily timeframe, the pair bounced back from a strong resistance range between 1.3070/1.2950, and staying below this range increases selling pressure on the pair targeting the level of 1.2500 in the medium term.

Breaking the ascending trend line on the daily timeframe near the level of 1.2500 will support further decline to the level of 1.2400.

On the upside, a rebound from the trend line and the formation of a price bottom on the 4-hour timeframe will support the rise again.