The Bank of Canada (BoC) has reduced its key interest rate by 25 basis points to 2.25%, signaling a possible end to the easing cycle. BoC Governor Tiff Macklem pointed out the economic harm from US tariffs but maintained that inflation is still close to 2%. As a result, the EUR/CAD pair fell to about 1.6180, with the Canadian Dollar (CAD) gaining strength after this decision. Although the rate has been cut, the BoC’s overall stance seems more hawkish. They believe the current policy rate is appropriate if economic conditions and inflation follow projections. The BoC also predicts that inflation will stay stable around 2% but has lowered GDP forecasts for 2025 and 2026. Macklem acknowledged ongoing challenges due to US trade policies and slowing global demand, which contribute to the weaker GDP outlook and softened labor market.

GDP Projections And Inflation

The BoC expects GDP to be 1.5% below previous forecasts by the end of 2026. Analysts believe it would require a significant shock for further rate cuts, as the BoC views the current rate as suitable. While more data will guide future decisions, the general agreement is that the easing cycle is over for now. The CAD’s strength after the BoC meeting contrasts with the European Central Bank’s (ECB) plan to keep interest rates stable. The main takeaway from the Bank of Canada’s decision today is that the rate-cutting phase is likely over for now. This shift to a more hawkish view, despite the 25 basis point cut to 2.25%, makes the Canadian dollar more appealing. The market’s quick response, bringing EUR/CAD down to 1.6180, supports this view and suggests that the Loonie might strengthen in the near future. There’s also a widening gap between the Bank of Canada and the European Central Bank. With the BoC pausing at 2.25% while the ECB is expected to maintain its rate at 2.00%, the interest rate difference now favors the CAD. A similar situation occurred in 2017 when the BoC began raising rates ahead of other central banks, leading to a lasting period of CAD strength.

Strategies And Market Outlook

In the coming weeks, we should explore strategies that take advantage of a declining EUR/CAD. One option is to buy put options expiring in December 2025 or January 2026 with strike prices below 1.6100. This would allow us to profit directly from this trend. With Canada’s latest inflation rate from September holding steady at 2.1%, the BoC has solid grounds to keep rates unchanged, supporting this trading idea. The BoC’s clear communication is likely to reduce implied volatility in CAD currency pairs, which is beneficial for selling options. We should consider selling out-of-the-money call spreads on EUR/CAD, as this strategy profits if the pair trades sideways or moves lower, while also benefiting from expected declines in volatility. Caution is advised regarding the USD/CAD pair, given that US tariffs still pose risks to the Canadian economy. Recent data showing a solid 2.4% annual growth in US GDP for the third quarter suggests the Federal Reserve is not in a hurry to cut its own rates, which could limit the Loonie’s potential against the US dollar. Thus, being short on EUR/CAD appears to be a stronger strategy than going long on CAD against USD. Create your live VT Markets account and start trading now.

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