Before the Bank of Canada’s rate decision on July 30, the Governing Council had mixed opinions about needing more monetary support. Some members thought existing measures were enough, while others felt additional aid might be necessary. The Council chose to delay their decision, looking for clearer signs that inflation expectations were stable. They noted concerns that changes in the global trading landscape could lead to lasting inflation.

Underlying Inflation Factors

The strength of underlying inflation played a key role in their rate decision. The Council found that the impact of reduced export demand on business investment, jobs, and household spending was minimal. In currency markets, USDCAD is trading between the 100-bar moving average on the 4-hour chart (1.37433) and the 100-day moving average (1.3778). Traders are observing these levels for any potential shifts. Following the mixed opinions from the Bank of Canada’s July 30 meeting, the central bank appears to be at a standstill, creating a buildup of pressure for the Canadian dollar. While some members felt current monetary policy was adequate, others anticipated a need for more support, prompting them to wait for clearer economic signals. This uncertainty is why USDCAD has stayed within a narrow range. This wait-and-see stance means that upcoming economic data will significantly influence the market. The July Consumer Price Index report, released on August 11, 2025, showed inflation rising to 3.1% year-over-year, slightly above expectations and reinforcing the Bank’s worries about strong underlying inflation. This unexpected rise supports those cautious about easing policy, putting upward pressure on the Canadian dollar in the near term.

Resilience of the Domestic Economy

The domestic economy also seems strong. The latest Labour Force Survey for July reported the unemployment rate steady at 6.2%, with an increase of 28,000 jobs. The limited negative effects from weaker export demand, mentioned in the minutes, align with this stable employment situation. This reduces the urgency for the Bank of Canada to consider rate cuts compared to other central banks around the world. For derivative traders, this period of low realized volatility but high potential for movement suggests that selling options may be risky. Instead, buying volatility through strategies like long straddles or strangles on USDCAD should be considered, especially with major data releases or the September 10 Bank of Canada meeting approaching. These strategies can profit from significant price changes in either direction when the Bank is forced to make a decision. The key technical levels to watch are the 100-bar moving average on the 4-hour chart around 1.3743 and the 100-day moving average near 1.3778. A clear break and close outside this range, likely triggered by the next inflation or employment report, will indicate the market’s next direction. We are prepared for this potential breakout, as this uncertainty cannot last indefinitely. On the other side of the exchange rate, comments from US Federal Reserve officials have raised concerns about softening consumer demand, indicating a possible policy divergence. If the Fed leans towards a more cautious approach while the Bank of Canada remains focused on data and inflation, it could lead to a significant drop in USDCAD. This divergence forms a crucial part of our trading strategy for the upcoming weeks. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now