USD/CAD: forecast ahead of Bank of Canada decision

The Bank of Canada will release its monetary policy decision on Wednesday. What will the USD/CAD do, given that it bounced off of last Friday's dynamic support?

Last year proved to be a year of consolidation for the pair. While the USD has appreciated against most of its peers (e.g., the euro, JPY, GBP), it has struggled to do the same against the Canadian dollar.

One of the reasons for the strength of the Canadian dollar was the monetary policy of the Bank of Canada. The central bank was one of the first banks to reduce its asset purchases in the developed world.

Furthermore, it did not hesitate to surprise the market, ignoring the consensus and proving to be more hawkish than expected. As a result, USD/CAD went nowhere in 2021, a year in which oil prices outperformed - another positive for the Canadian dollar.

USD/CAD bullish bias persists above 1.23
The technical picture looks bullish as the market holds above 1.23. This is a pivotal level, and as long as it is above, the bulls will continue to push against the horizontal resistance seen in the 1.30 area.

Last Friday, the market rebounded from dynamic support. However, the series of higher lows remains intact and pressure is building to push against resistance.

A break below 1.23 appears to control the downside
On the other hand, a break below 1.23 gives the bears control. Such a move opens the doors for a new attempt at the 1.20 level - a level that offered strong support on the first attempt to break lower.

Will the Bank of Canada make a hawkish statement?
There are two wild cards that can influence USD/CAD price action and, therefore, can lead to a break of important technical levels. One is the Bank of Canada's decision expected this Wednesday.

The market is not expecting any change in interest rate levels, but this is a central bank that is used to surprising the markets. In fact, many market participants believe that the bank should act sooner to combat rising inflation.

Another is the price of oil. The price of WTI crude oil has surpassed 2021 highs and is threatening to exceed $89. As long as the price of oil remains bid, the Canadian dollar remains bid as well, as rising oil prices bode well for Canadian GDP.