Canadian Dollar slips despite expectations of a BoC rate hike

• 1.4010 is the approximate level for USD/CAD as it advances in early European trading on Monday.
• Wednesday is set to bring a Bank of Canada rate increase to 2.50%.
• An unchanged Fed rate at the October policy meeting carries a market-implied probability of around 90.6%.

1.4010 is the approximate level for USD/CAD, which is posting modest gains. The pair is trading in the early European session on Monday, with lower crude prices putting the commodity-linked Canadian Dollar (CAD) under pressure against the US Dollar (USD). Attention now turns to Wednesday’s interest rate decisions from the US Federal Reserve (Fed) and Bank of Canada (BoC).

Monday’s decline in oil follows a report that Qatari mediators visited Tehran on Sunday in a US-coordinated effort to ease regional tensions. As Canada is a major oil exporter, weaker crude prices typically weigh on the Loonie.

Vandana Hari, founder of oil market analysis provider Vanda Insights, said: "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,"

Most economists surveyed by Reuters expect the BoC to lift its overnight rate by 25 basis points (bps) to 2.50% at Wednesday’s October policy meeting. They anticipate one further increase by the end of March to head off any additional rise in inflation expectations.

Against the CAD, the Greenback could come under pressure from cautious Fed commentary. On October 16, Fed Chair Kevin Warsh said he would not prejudge future interest rate decisions.

While New York Fed President John Williams said one more rate increase this year could be appropriate, Fed Vice Chair Philip Jefferson and Governor Christopher Waller saw no need to hurry further increases. The CME FedWatch tool now puts the probability of unchanged rates at the October meeting at 90.6%.

Canadian sentiment gains face tariff, inflation and borrowing-cost risks

Financial markets and labour conditions have partly fuelled the recent rise in Canadian confidence, according to Rabobank analysts. They link “much of the improvement in the CSCE indicator” to a better financial-market outlook and “confidence in the labor market.” Yet the analysts see continued fragility in underlying growth. They argue that “US tariffs pose a risk to Canadian manufacturing and could reverse some of the improvement in the goods-producing sector,” adding that “investment in Canada has had a weak post-pandemic recovery, and elevated trade tensions continue to weigh on businesses’ capital expenditures and hiring plans.”

Persistent price pressures are also evident in expectations. Rabobank observes 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,” highlighting the inflation challenge. In this context, the bank cautions 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,” implying little room to tighten policy without intensifying existing household financial stress.

5.6/10: Warsh highlights investment and AI without committing on rates

A 5.6/10 score on the FXS Speechtracker puts Fed Chair Warsh’s speech slightly below the historical average of 6.1/10. It signals a cautious approach guided by incoming data. His reference to being “over-scarred from the global financial crisis” points to an enduring focus on risk management. At the same time, Warsh emphasises structural growth and a surge in investment supported by “good policies,” without prejudging forthcoming FOMC decisions. His focus on AI as a near-term source of demand and a means of improving confidence in data gives the speech a forward-looking, structurally hawkish character. It offers no explicit guidance, however, on the Dollar’s direction.

With a move of 0.00 points, the FXS Fed Sentiment Index held at an elevated 127.51. The unchanged reading suggests the speech keeps the broader policy outlook firmly hawkish, notwithstanding the slightly softer FXS Speechtracker score. The index remains well above 100, while Warsh emphasises price stability, strong investment and financial stability risks. Markets are therefore likely to view expectations of a continued Fed preference for tighter policy as supportive of the Dollar, unless the data materially disappoint.

Technical Analysis: 100-day SMA continues to cap USD/CAD

Below both the 100-day simple moving average (SMA) and the Bollinger middle band, USD/CAD retains a bearish near-term outlook on the daily chart. The pair remains confined to the lower half of its recent volatility envelope. A Relative Strength Index (14) reading of 39, drifting below the neutral 50 line, points to mild downside pressure rather than outright oversold conditions.

The first resistance on an advance is the 100-day SMA near 1.4045. Beyond that lies the Bollinger middle band at 1.4170, with the upper band at 1.4355 defining a broader bullish threshold. Initial downside support sits around 1.3985 at the Bollinger lower band. A sustained breach would likely prolong the correction towards lower daily lows.

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