Market pricing and economists favour a 25bp hike from the BOC tomorrow

The Bank of Canada are expected to hike interest rates by 25bp tomorrow according to market pricing and economists. The hike would see their benchmark rate rise to 4.5% - its highest level since October 2007 – and on par with the Fed yet above the RBNZ’s 4.25% rate. A 25bp hike would be the slowest pace since their first hike of this cycle in March 2022, after which they moved up 50bp increments, a 100bp hike and a 75bp hike along the way. The central bank will also provide minutes from the meeting on February the 8^th, which is the first time in their history.

Money markets suggest an 80% chance of a 25bp hike, whilst 25 of 26 economists polled by Reuters (96%) also anticipate the move. With a 25bp hike all but a given, it could take a surprise hold to prompt volatility for traders. But then looking through the latest business and consumer sentiment surveys suggest we could be fast approaching the BOC’s terminal rate. So traders should also be on guard for a potential dovish hike, where the BOC may hint that they’re nearing the end of their tightening cycle. And that could spell further weakness for the Canadian dollar.

The BOC pay close attention to their quarterly business and consumer outlook surveys, and the general trend across both is a concern of high inflation weighing on their outlook for the economy. So on that front the rate hikes are doing their job to cool the economy by lowering demand.

However, with inflation remaining stubbornly high and both Trimmed Mean and Median CPI hovering near their multi-decade highs and nearly twice the upper bound of their 1-3% target range, it leaves the potential for at least 1 or 2 more 25b hikes.

Summary of the quarterly BOS (business outlook survey)

• Business confidence continues to weaken
• 29% of firms expect their sales to decline
• Firms intentions to increase investment and hire continued to trend lower
• Rising interest rates are weighing down firms’ outlooks
• Expectations of labour costs remain historically high yet fell for a fifth consecutive month
• Business expect growth of their input and output prices to slow
• Firms think inflation will stay high in the short-term (0-2 years)

Summary of consumer expectations survey

• Consumers have reduced purchases of a broad range of goods and services due to high inflation and interest rates
• Real wages continued to decline and access to credit has worsened
• Most consumers expect a mild to moderate recession in Canada within the next 12 months
• Two thirds of those expecting a recession do not think it will be severe
• Expectations for inflation one year from now remain elevated at a high level, while actual inflation steadied

GBP/CAD 4-hour chart:

With the BOE making increasingly hawkish comment and the BOC likely nearing the end of their tightening cycle, GBP has risen over the past two weeks. Yet prices have also pulled back the past two days and we’re waiting to see if the cross can hold above support around 1.6445, which comprises of previous highs, the monthly pivot point and the 20-day EMA.

The 4-hour chart shows a lower wicks and a Doji respected the 20-bar EMA, so perhaps prices are trying to form a low. The bias remains bullish above 1.6400, so bulls could either seek to enter around current levels (if confident a low is near), or wait to see if prices pull back to the 1.6450 resistance level – then seek evidence of a swing low.

Take not that the 200-week EMA resides around 1.6700 and makes a likely resistance level. But for now the bias is for an eventual break above it, based on the strength of the bullish trend on the daily chart overall.