USD / CAD hits two-week high at 1.2762, due to a moderate BoC

• The Bank of Canada kept its interest rates unchanged at 0.25%.
• BoC decided to keep its QE program at Cdn $ 2 billion per week.
• The bank expects to absorb the economic slack and reach the inflation target of 2% by mid-2022.

USD / CAD is recovering during the American session. The pair is trading at 1.2735, up 0.72% at time of writing.

The main driver of price action is the Bank of Canada’s monetary policy decision. The central bank decided to keep its rate unchanged at 0.25%. The quantitative easing (QE) program remains at CAD2 billion per week.

The central bank mentioned that the global economic recovery continued through the second quarter, driven mainly by strong growth in the United States and carries solid momentum into the third quarter. However, supply chain disruptions restrict activity in some sectors, and COVID-19 outbreaks in some regions threaten to slow the global recovery.

However, on September 1, Canadian GDP showed that the economy contracted 1.1% in the second quarter, year-on-year. The contraction was attributed to exports. The worst-performing sector was the housing market, as previously expected. Consumption, business investment and public spending contributed positively to growth, with growth in domestic demand exceeding 3%.

Working conditions improved through June and July, but considerable slack remains, with low-wage workers severely affected. The BoC expects the economy to strengthen in the second half of 2021, but supply bottlenecks and the fourth wave of COVID-19 could weigh on the economic recovery.

CPI inflation remains above 3% as expected, driven by energy-related supply bottlenecks and the pandemic. The BoC expects the price increase to be transitory, but will be closely monitored.

The BoC reiterated that the recovery still needs monetary support. The central bank is expected to maintain its interest rates at current levels until the QE program ends and the 2% inflation target is reached. According to the BoC projections, this will occur in the second half of 2022.