Canadian Dollar softens despite BoC rate hike expectations

• USD/CAD gains traction to around 1.4010 in Monday’s early European session.
• The Bank of Canada is set to raise rates to 2.50% on Wednesday.
• Markets price in around a 90.6% chance that the Fed will hold rates steady at its October policy meeting.

The USD/CAD pair trades with mild gains near 1.4010 during the early European trading hours on Monday. A decline in crude oil prices weighs on the commodity-linked Canadian Dollar (CAD) against the US Dollar (USD). Traders brace for the US Federal Reserve (Fed) and Bank of Canada (BoC) interest rate decisions later on Wednesday.

Oil prices fall on Monday after a report that Qatari mediators were in Tehran on Sunday as part of an effort to de-escalate regional tensions in coordination with the US. It is worth noting that Canada is a major oil-exporting country, and low crude oil prices generally have a negative impact on the Loonie.

"Concerns over renewed military hostilities in the Middle East, which drove much of last week’s crude rally, have eased this morning, but the reprieve may prove temporary," said Vandana Hari, founder of oil market analysis provider Vanda Insights.

The BoC is likely to raise its overnight rate by 25 basis points (bps) to 2.50% at its October policy meeting on Wednesday and follow with one more hike by the end of March to pre-empt any further rise in inflation expectations, according to a majority of economists polled by Reuters.

A cautious tone from Fed officials could undermine the Greenback against the CAD. Fed Chair Kevin Warsh said on October 16 that he would not prejudge future rate decisions.

New York Fed President John Williams said that one additional rate increase this year could be appropriate. Meanwhile, Fed Vice Chair Philip Jefferson and Governor Christopher Waller stated that there was no need to rush further hikes. According to the CME FedWatch tool, the chance of no change in rates at the October meeting now stands at 90.6%.

Canada sentiment improves but tariffs, inflation and borrowing costs cloud outlook

Analysts at Rabobank highlight that recent gains in Canadian confidence are being driven in part by financial markets and the labour backdrop, with “much of the improvement in the CSCE indicator” attributed to an improved outlook for financial markets and “confidence in the labor market.” However, they caution that the underlying growth picture remains fragile. In their view, “US tariffs pose a risk to Canadian manufacturing and could reverse some of the improvement in the goods-producing sector,” while “investment in Canada has had a weak post-pandemic recovery, and elevated trade tensions continue to weigh on businesses’ capital expenditures and hiring plans.”

On the inflation front, Rabobank notes that “consumer short- and medium-term inflation expectations have recently converged with climbing five-year expectations to a level which remains well above the Bank of Canada’s 2% target,” underscoring persistent price pressures. Against that backdrop, the bank warns that “higher borrowing costs would only add to the strain on households already facing elevated prices, rather than materially improving the cost of living for Canadian consumers,” suggesting limited scope for tighter policy without exacerbating existing household stress.

Warsh flags investment surge and AI focus but avoids pre-committing on rates

Fed Chair Warsh’s speech scores 5.6/10 on the FXS Speechtracker, modestly softer relative to the historical average of 6.1/10 and reflecting a cautious, data-dependent tone. The remark about being “over-scarred from the global financial crisis” underscores a lingering bias toward risk management even as Warsh highlights structural growth and an investment surge driven by “good policies,” while refusing to pre-judge upcoming FOMC decisions. The emphasis on AI as a near-term demand-side force and a tool to strengthen data confidence adds a forward-looking, structurally hawkish flavor, but without explicit guidance on the path for the Dollar.

The FXS Fed Sentiment Index was unchanged, moving 0.00 points to a still-elevated level of 127.51, signaling that the speech leaves the broader policy narrative firmly in hawkish territory despite the slightly softer FXS Speechtracker score. With the index well above 100 and Warsh stressing price stability, investment strength, and financial stability risks, markets are likely to see the Dollar supported by expectations that the Fed remains inclined toward tighter policy unless data materially disappoints.

Technical Analysis: USD/CAD remains capped under the 100-day SMA

In the daily chart, USD/CAD holds a bearish near-term bias as it remains below the 100-day simple moving average (SMA) and the Bollinger middle band, keeping price capped within the lower half of the recent volatility envelope. The Relative Strength Index (14) at 39 is drifting below the neutral 50 line, which reinforces a soft downside tone rather than outright oversold conditions.

On the topside, initial resistance is located at the 100-day SMA near 1.4045, followed by the Bollinger middle band at 1.4170, while the Bollinger upper band at 1.4355 marks a broader bullish threshold. On the downside, immediate support emerges at the Bollinger lower band around 1.3985, and a sustained break beneath this level would likely extend the corrective phase toward lower daily lows.

(The technical analysis of this story was written with the help of an AI tool. Know more.)