The Canadian Dollar has increased for the third straight day after the Bank of Canada (BoC) cut its policy rate by 25 basis points, lowering it to 2.25%. This change caused the USD/CAD to drop to 1.3893, its lowest point since September 25. The BoC indicated that this easing cycle may soon end, as inflation forecasts remain close to the 2% target.

Market Reactions

Governor Tiff Macklem pointed out challenges from US tariffs and lower global demand. He emphasized that monetary policy has limited ability to boost demand while keeping inflation low. The BoC revised its 2025 inflation forecast down to 2.0% from 2.3% and expects Canada’s GDP to decline by 1.5% by the end of 2026 compared to earlier predictions. As a result, traders lowered their expectations for additional rate cuts, anticipating no significant changes until March next year. Now, all eyes are on the US Federal Reserve, expected to announce a 25 basis point rate cut to a range of 3.75-4.00% at 18:00 GMT. This follows easing inflation pressures and weaker labor conditions. The upcoming monetary policy statement and Chair Jerome Powell’s press conference will attract significant attention. The BoC’s “hawkish cut” suggests a growing divide with the Federal Reserve. The BoC likely won’t ease rates further, maintaining its policy rate at a suitable level. This provides a strong basis for the Canadian Dollar to strengthen against the US Dollar, especially as the Fed is expected to continue cutting rates. This perspective is reinforced by recent Canadian economic data that shows a robust economy. The CPI report for September revealed inflation steady at 2.1%, slightly above the BoC’s target. Additionally, Statistics Canada reported a drop in the unemployment rate to 5.4%. These figures give the BoC little reason to consider further rate cuts, making the Canadian Dollar (Loonie) more appealing.

Economic Outlook

On the other hand, the US economy supports the Fed’s decision to ease rates. The non-farm payrolls report for September 2025 showed only a modest addition of 150,000 jobs, below expectations, and the Core PCE inflation measure has decreased for four consecutive months, now at 2.8%. This soft data allows the Fed to justify further rate cuts to support the economy, putting downward pressure on the US Dollar. For derivative traders, this indicates that the USD/CAD is likely to trend lower in the coming weeks. Traders might consider strategies that benefit from a declining or capped USD/CAD rate, such as buying puts on the pair or selling out-of-the-money call spreads. The fundamentals suggest a move towards the 1.3700 level, last observed in early summer 2025. This pattern has been evident in past cycles where policy divergence influences the currency pair. For instance, during 2017, a more hawkish BoC compared to the Fed led to a significant and sustained rally in the Canadian Dollar. The current situation echoes that time, indicating this trend could continue into the year’s end. The immediate focus is on the Federal Reserve’s tone later today. Although the 25 basis point cut is anticipated, any signal from Chair Powell that the easing cycle might be shorter than expected could trigger a sudden rally in USD/CAD. Traders may use short-dated options to hedge against this event risk or prepare for increased volatility around the announcement. Create your live VT Markets account and start trading now.

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