USD/CAD consolidates losses above 1.22, down more than 150 pips on day

By losing more than 200 pips on the Bank of Canada's surprise decision to hike its policy rate by 25 bps to 1%, the USD/CAD pair refreshed its lowest level since June of 2015 at 1.2153 in the early NA session. Following the initial reaction, the pair started to retrace its losses and is now trading at 1.2220, still losing 1.25% on the day.

Although the BoC in its statement said that stronger-than-expected economic growth was the primary reason behind today's verdict, it sounded cautious on some ongoing issues. "“It bears noting that the rate hike today was couched as a “removal of some of the considerable monetary policy stimulus,” and that future decisions are not predetermined. The statement also spoke of some remaining slack in labor markets and subdued wage pressure on inflation. The headline rate of CPI inflation in Canada is just 1.2 percent at present, near the low end of the target range," Wells Fargo analysts said in a recent report.

• Bullish Bank of Canada hikes rates again - ING

On the other hand, the US Dollar Index, which fell below the 92 handle for the first time in a week, reversed course in the second half of the NA session on the back of some optimistic comments seen in the Fed's Beige Book. According to the Beige Book, consumer spending increased most districts while prices rose modestly overall across the country. At the moment, the DXY was at 92.25, virtually flat on the day.

• Fed's Beige Book: Prices rose modestly overall across the country

Tomorrow's economic calendar will feature Ivey PMI from Canada, which is expected to improve to 61.3 from 60 in August, as well as weekly jobless claims and unit labor costs and nonfarm productivity from the U.S. A higher-than-expected unit labor costs for the second quarter, could help the greenback extend its recovery against its peers as it would signal towards increasing wage inflation.

Technical outlook

1.2150 (daily low) could be seen as the first short-term technical support for the pair ahead of 1.2120 (Jun. 18, 2015, low) and 1.2000 (psychological level). On the upside, resistances align at 1.2300 (psychological level), 1.2370 (daily opening level) and 1.2440 (10-DMA). The RSI on the daily graph is now moving near the 30 mark, suggesting that the pair could extend its technical correction before pushing further lower.