BoC rate hike lifts Canadian Dollar as attention turns to US PCE data

• 1.3975 is the approximate level for USD/CAD as it slips in early Asian trading on Thursday.
• More than three years after its previous rate increase, the BoC lifted interest rates again.
• October saw the Fed leave its benchmark interest rate unchanged.

USD/CAD retreats towards 1.3975. In early Asian trading on Thursday, the Canadian Dollar (CAD) gains against the US Dollar (USD) following a rate increase by the Bank of Canada (BoC). Attention now turns to Thursday’s preliminary US Gross Domestic Product (GDP) release for the third quarter (Q3), alongside September’s Personal Consumption Expenditures (PCE) inflation figures.

A 25 basis points (bps) increase took the BoC’s benchmark overnight interest rate to 2.50% at Wednesday’s October policy meeting. Further increases might be needed, Governor Tiff Macklem said. However, uncertainty over the economic outlook would require policymakers to move cautiously.

The BoC set out its revised global outlook in its statement: "Given the ongoing resilience of the global economy, the Bank has revised up global GDP growth slightly to 3.1% in 2026, while growth in 2027 and 2028 remains unchanged from the July projection at 3.2%."

Renewed fears of Middle East energy supply disruptions lift oil prices on Thursday. Reuters reported that Yemen’s Iran-aligned Houthis attacked Aden airport on Wednesday, after the group had urged people to evacuate the facility. The Houthis had said on Tuesday that they launched a ballistic missile towards the Ras Tanura oil refinery in eastern Saudi Arabia, the kingdom’s largest refinery.

As a major oil exporter, Canada generally sees its currency, the Loonie, benefit from elevated crude prices.

Wednesday’s Federal Reserve (Fed) decision matched broad expectations: the benchmark federal funds rate stayed within the 3.75% to 4.00% range.

While upgrading its economic assessment, the US central bank acknowledged that inflation 'remains elevated,' signalling that further rate increases may depend on inflation’s performance.

BoC rate hike bets rise; banks question lasting CAD upside

Underlying inflation remains close to the Bank of Canada’s projections, according to BBH analysts, who note that “the average of CPI trim and median was 1.85% y/y in September, tracking just below the BoC’s 2.0% Q3 projection.” A potential upside risk comes from expectations: “the pick-up in firm’s one- and two-year inflation expectations could lift the core CPI outlook, reinforcing the case for further hikes.” Higher BoC projections are also BBH’s expectation. The analysts argue that “the BoC will likely raise its inflation and real GDP forecast, which can underpin CAD,” pointing out that “September headline CPI printed at 3.1% y/y, exceeding the bank’s 2.5% Q3 projection, while Q2 real GDP grew 3.3% annualized vs. the bank’s 2.5% projection.”

2% inflation pledge: Warsh sustains support for Dollar bulls

A 7/10 FXS Speechtracker reading places Warsh’s firmly hawkish press conference tone in line with the established baseline, signalling continuity rather than a policy regime change. His emphasis on “ensuring price stability is not about a fixed date on a calendar”, together with references to “new monetary medicine” and September’s withdrawal of accommodation, points to policy remaining data-dependent and firmly directed at suppressing inflation. That message holds even as inflation expectations are described as “going the right way.” Warsh repeatedly pledged “no ifs and or buts, we will deliver price stability” and maintained a firm 2% PCE target, while acknowledging that interest rates are affecting technology and CAPEX. Together, these points reinforce the prospect of continued restrictive policy, supporting the Dollar and leaving risk assets exposed to further tightening signals.

A +14.39-point jump took the FXS Fed Sentiment Index to 141.89, pushing it further into hawkish territory and aligning with the FXS Speechtracker’s steady 7/10 assessment. The reading stands well above the neutral 100 mark. Markets are therefore likely to view Warsh’s emphasis on effective “monetary medicine” and his firm commitment to the 2% PCE target as confirmation of a higher-for-longer interest rate path. Such conditions typically support the Dollar but weigh on high-beta FX and rate-sensitive assets.

Technical Analysis: 100-day SMA caps USD/CAD as bearish bias persists

Trading below both the 100-day simple moving average (SMA) and the Bollinger middle band leaves USD/CAD with a bearish near-term bias on the daily chart. The pair is pulling back from the upper half of its recent Bollinger envelope. At 38.5, the Relative Strength Index (14) indicates subdued momentum rather than outright oversold conditions. Sellers appear to retain control, although downward momentum is easing.

The 100-day SMA near 1.4045 provides the first resistance, ahead of the Bollinger middle band at 1.4140 and the upper band towards 1.4350. A break above the latter would be required to relieve the prevailing bearish pressure. Support first comes into focus at the lower Bollinger band around 1.3930. A decisive break below that level would leave room for the corrective decline to extend over the coming sessions.

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