The Canadian dollar continues to drift this week. In the Tuesday session, USD/CAD is trading at 1.2532, down 0.02% on the day.
All eyes will be on the Bank of Canada policy meeting on Wednesday (14:00 GMT). The bank is expected to maintain interest rates at 0.25%, where they have been pegged since last March, at the start of the Covid-19 pandemic. Any drama will revolve around the bank's QE programme, with the BoC widely expected to trim weekly government bond purchases from CAD 4 billion to 3 billion.
A trimming of QE would be in response to the economic recovery, which has been faster than anticipated. Some 90% of jobs lost during Covid have been recovered and GDP is expected to climb above pre-pandemic levels in the second quarter.
With the economy clearly moving in the right direction, the cautious BoC will likely respond with a tapering QE, while maintaining interest rates and its accommodative monetary policy. Although a tapering move is expected, the Canadian dollar could gain ground on Wednesday due to the sheer significance of such a move - it would mark the first tightening in policy by any major central bank since the Covid pandemic.
We could also see the Canadian dollar react to the tone of the rate statement. A "less dovish" tone than expected from the bank could improve sentiment towards the Canadian dollar and send the currency to higher ground.
Canada will also release inflation data on Wednesday (12:30 GMT), although these numbers are likely to be overshadowed by the BoC rate decision. Headline inflation is expected to tick higher to 0.6%, up from 0.5%, while Core CPI is expected to fall to 0.0%, down from 0.3%.
There is support at 1.2446. This is followed by support at 1.2386. On the upside, we have resistance levels at 1.2598 and 1.2690