USD/CAD is facing pressure as traders expect a 25-basis-point rate cut from the US Federal Reserve on Wednesday. As a result, the USD/CAD pair is trading around 1.3990, marking its second day of losses. The Fed is likely to reduce the benchmark rate to 3.75-4.00%, with nearly a 97% chance of a cut in October and a 95% chance in December.

Impact on the Canadian Dollar

The Canadian Dollar (CAD) may have a tough time ahead due to possible increases in oil production by OPEC+ in December, which could impact oil prices. Additionally, the Bank of Canada is also expected to cut rates by 25 basis points on October 29. Currently, oil prices, including West Texas Intermediate, are declining, trading at about $61.10 per barrel. The CAD is affected by the Bank of Canada’s interest rates, oil prices, and the health of the US economy. Canada’s main economic indicators, such as inflation and public sentiment, play a crucial role in shaping the CAD’s strength. Strong economic data can support the CAD, while weak data may lead to its decline. Furthermore, recent tariff increases on Canadian goods announced by the US President could negatively impact the CAD. The Bank of Canada influences the economy through actions like quantitative easing and tightening, which can alter credit conditions. It adjusts interest rates to control inflation, aiming for a target range of 1-3%. Higher oil prices and solid economic data could strengthen the Canadian Dollar. Looking at the market on October 28, 2025, USD/CAD is trading around 1.3710, showing a different scenario compared to when it struggled below 1.4000. Both the Federal Reserve and the Bank of Canada (BoC) appear to have ended their aggressive rate hikes, but the key question is who will cut rates first. The current market suggests a 65% chance that the BoC will cut rates in the first quarter of 2026, ahead of the Fed.

The Path Forward

Signs of economic softening in the US warrant attention. The most recent Initial Jobless Claims increased to 230,000, and the latest core inflation reading has fallen to 3.1%, getting closer to the Fed’s target. This data reinforces the idea that the Fed may hold rates steady, though it also makes them sensitive to potential economic weakness, which could quickly bring forward rate cut expectations. The Canadian dollar is facing challenges despite relatively stable oil prices, with West Texas Intermediate around $79 per barrel. Canada’s latest GDP report shows a slight contraction of 0.1% in the last quarter, indicating the economy’s vulnerability to high-interest rates. This divergence, with Canada’s economy weakening faster than the U.S., suggests that USD/CAD could trend upward. Traders should be cautious about expecting strong Canadian dollar performance. We remember times, like late 2019, when both central banks were adopting dovish stances, leading to unpredictable, range-bound trading. A practical strategy now might be to buy USD/CAD on dips, aiming for a move back toward the 1.3850 area in the coming weeks as the market adjusts to a more dovish BoC. Unlike previous periods of sudden tariff announcements, the current trade environment under USMCA is more stable, reducing volatility. Consequently, we should focus on the upcoming employment and inflation data from both countries. Any unexpectedly weak Canadian data or strong US data is likely to accelerate the upward trend of the currency pair. Create your live VT Markets account and start trading now.

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