USD/CAD strengthens after BoC keeps policy steady; Fed in the spotlight
- Canadian Dollar softens after the BoC signals a steady policy stance.
- BoC keeps rates unchanged at 2.25%, reaffirming policy is “about the right level” as inflation stays near target.
- Market attention now turns to the Fed decision and updated economic projections.
The Canadian Dollar (CAD) trades under pressure against the US Dollar (USD) on Wednesday as markets digest the latest interest rate decision from the Bank of Canada (BoC). At the time of writing, USD/CAD is trading around 1.3861, with traders now turning their attention to the Federal Reserve’s (Fed) monetary policy announcement due later at 19:00 GMT.
The BoC kept its overnight rate unchanged at 2.25%, in line with market expectations, and maintained a steady tone in its policy statement. The central bank noted that while global conditions remain uncertain, Canada’s economy expanded by a stronger-than-expected 2.6% in the third quarter, driven mainly by volatile trade flows rather than stronger domestic demand.
The BoC now expects Gross Domestic Product (GDP) to soften in the fourth quarter before picking up in 2026. Inflation remains close to target, with headline CPI at 2.2% and core measures holding between 2.5% and 3%. Given this backdrop, the Governing Council reaffirmed that the current rate is “about the right level” to manage inflation risks and guide the economy through broader structural adjustments linked to global trade frictions.
Governor Tiff Macklem’s opening comments ahead of the press conference reinforced the Bank’s cautious stance. He acknowledged the economic drag from steep US tariffs but emphasized that the Canadian economy has shown resilience. Macklem also noted that inflation pressures remain contained and that keeping the policy rate at the lower end of the neutral range is appropriate for now.
In the United States, the Fed is poised to deliver another 25 basis point (bps) rate cut, which would bring the Federal Funds Rate down to the 3.50%-3.75% range. Attention will be squarely on Fed Chair Jerome Powell’s post-meeting press conference, along with the updated dot plot and economic projections.
Bank of Canada FAQs
The Bank of Canada (BoC), based in Ottawa, is the institution that sets interest rates and manages monetary policy for Canada. It does so at eight scheduled meetings a year and ad hoc emergency meetings that are held as required. The BoC primary mandate is to maintain price stability, which means keeping inflation at between 1-3%. Its main tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger Canadian Dollar (CAD) and vice versa. Other tools used include quantitative easing and tightening.
In extreme situations, the Bank of Canada can enact a policy tool called Quantitative Easing. QE is the process by which the BoC prints Canadian Dollars for the purpose of buying assets – usually government or corporate bonds – from financial institutions. QE usually results in a weaker CAD. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The Bank of Canada used the measure during the Great Financial Crisis of 2009-11 when credit froze after banks lost faith in each other’s ability to repay debts.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the Bank of Canada purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the BoC stops buying more assets, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Canadian Dollar.
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