The Bank of Canada is likely to keep the overnight rate steady at 2.25% in January. The upcoming policy statement is expected to be cautious, reflecting updated GDP figures and a smaller output gap than previously thought.

New Monetary Policy Report

The new Monetary Policy Report will take into account the 2025 Federal Budget and adjustments to past GDP data. These adjustments show a smaller output gap compared to the October report, with slower GDP growth in the fourth quarter and a recent dip in core inflation. The Bank of Canada is prepared to respond to changes in the economy, but we do not expect any major shifts in its guidance at this time. Since the Bank is set to keep the overnight rate at 2.25%, we foresee a period of less fluctuation in interest rate markets. This cautious approach suggests that traders who anticipate aggressive rate hikes soon may be mistaken. Instead, traders might consider strategies that benefit from stable rates, like selling front-month Bankers’ Acceptance futures (BAX) contracts, which currently price in an unlikely rate increase. The Bank’s cautious tone is supported by recent economic data showing a slowdown. For example, the final quarter of 2025 showed annualized GDP growth at just 0.8%, and December’s core inflation fell to 2.1%, only slightly above the Bank’s target. This economic backdrop makes the Canadian dollar less attractive. As a result, currency traders might want to buy call options on USD/CAD, which would gain value if the Canadian dollar continues to weaken against the US dollar.

Data Dependent Approach

In 2025, the Bank has consistently relied on data after a series of rate hikes, and this policy hold continues that trend. This predictability suggests that volatility for Canadian dollar currency pairs may decrease in the coming weeks. One possible strategy is to sell option strangles on USD/CAD, aiming to earn premium as the currency pair stays within a certain range, assuming no major economic surprises occur. The Bank is not expected to make significant changes to its guidance, which makes upcoming data releases very important. We will closely watch the next Labour Force Survey and CPI inflation report for signs of any shift in the outlook. Significant deviations from expectations in these reports could trigger major moves in both interest rate and currency derivatives. Create your live VT Markets account and start trading now.

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