06:49 AM EDT, 07/24/2024 (MT Newswires) -- ING expects the Bank of Canada (BoC) to cut the policy rate by 25bps Wednesday at 9:45 a.m. ET.

This is almost entirely priced in by financial markets (21bps), which currently expect 65bps of easing by year-end, wrote the bank in a note to clients. Consensus isn't unanimous, but the majority of economists call for a cut as opposed to a hold.

There is a strong case from a macro perspective to continue easing after the June cut, stated ING. All main measures of inflation are now within the 1%-3% BoC tolerance band, with the headline and median core rates coming in lower than expected in June at 2.7% and 2.6% respectively. The jobs market has also weakened more than expected, with employment growth turning negative and unemployment rising to 6.4% in June. The BoC's business outlook survey (BOS) showed a further deterioration in Q2.

The only argument for keeping rates on hold at this meeting is probably the divergence with the United States Federal Reserve, according to the bank. However, markets have grown increasingly confident about a Fed cut in September, and the BoC has so far shown little concerns about decoupling with its US counterpart.

ING thinks this could be a problem moving forward if Fed communication and/or US data decreases the likelihood of a rate cut in September, which may lead the BoC to skip a September cut too.

The widening BoC-Fed gap has obvious repercussions on the Canadian dollar (CAD or loonie), and there could be some concerns down the road that an excessive depreciation of the loonie raises inflationary risks. In the bank's view, as long as USD/CAD stays under 1.40, the currency situation should remain very much secondary in the BoC's decision-making.

Markets will focus on forward-looking indications by the BoC, added the bank. There is a possibility that Governor Tiff Macklem will strike a cautious tone on further easing and take shelter behind a data-dependent, meeting-by-meeting approach.

Still, the risks are skewed towards the downside for CAD as markets will be tempted to fully price in another two cuts by year-end, noted ING. USD/CAD may find its way well into the 1.38-1.39 range in the near term and CAD could start losing some ground against other high-beta G10 currencies.