Bank of Canada Governor Tiff Macklem recently talked about the bank’s monetary policy after cutting the interest rate to 2.25%. This decision aims to help the economy adjust to challenges from US trade policies, even though tariffs are still hurting Canada’s economic outlook. The Bank expects the GDP by the end of 2026 to be 1.5% lower than earlier forecasts. Inflation is projected to stay around 2%. Growth predictions have also been changed, with expectations of 1.2% growth in 2025 and 1.1% in 2026. These adjustments reflect weaker demand and the effects of US tariffs.

Canadian Economic Outlook

The Canadian job market is slowing down, with hiring becoming more difficult, and inflation pressures are easing. There are still uncertainties related to US trade policies, which make the forecasts cautious. After the rate cut, the Canadian Dollar performed well against many currencies. The Bank of Canada confirmed its decision to reduce the policy rate, aligning with expectations. This follows another cut in September. The country is facing slow growth and ongoing inflation, with a 1.6% shrink in the economy during the second quarter. Recent data showed a slight rise in inflation, impacting the bank’s decision-making. Several factors influence the Canadian Dollar, including interest rates, oil prices, trade balance, and economic data such as GDP and employment rates. Changes made by the Bank of Canada and current economic conditions have direct effects on the currency’s value. The Bank of Canada has reduced the interest rate to 2.25%, something many anticipated. This decision was made to support a struggling economy impacted by US trade tariffs. The bank has significantly lowered its growth forecasts, predicting a GDP decline of about 1.5% by the end of 2026.

Impact on Currency and Markets

For traders in derivatives, the situation is tricky. Surprisingly, the Canadian dollar strengthened today despite the rate cut. This suggests that the market had already anticipated the cut, meaning easy bets against the CAD are gone. Future moves will greatly depend on whether upcoming data worsens beyond current gloomy forecasts. The economic troubles are evident in earlier numbers for 2025. The economy shrank by 1.6% in the second quarter, and unemployment has risen to 7.1%, significantly above the 6.2% seen in mid-2024. The weak job market and slow hiring clearly show how US trade policies are affecting Canada. Even though WTI crude oil prices remain strong above $85 per barrel—typically a boost for the Canadian dollar—the currency has been weak. This suggests that worries about Canada’s economy and uncertainty over US trade are overshadowing the benefits from oil prices. We need to closely monitor this relationship because any drop in oil could worsen CAD weakness. The central bank acknowledges that the range of possible outcomes is broader than usual, leading to higher uncertainty. This indicates increased volatility in the coming weeks, especially for USD/CAD options. Rising implied volatility shows that traders expect significant price changes as we seek more clarity on US trade policy. Thus, it’s essential to track key technical levels and incoming data. The USD/CAD pair’s success in staying above its 200-day moving average near 1.3950 is crucial. If it drops below this, it could indicate a shift in sentiment. Conversely, if it moves toward the October peak of 1.4080, it would confirm a resurgence of the Canadian dollar’s underlying weakness. Create your live VT Markets account and start trading now.

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