Canadian Dollar shows little change as Fed holds rates after BoC hike

• USD/CAD fluctuates around 1.4050 after BoC rate rise; Fed hold prompts little response.
• A rise from 2.25% to 2.50% marks the BoC's first rate increase since July 2023.
• Friday brings Canada's August GDP release, with Statistics Canada having estimated growth of 0.2%.

Wednesday's increase in the Bank of Canada (BoC) rate to 2.50%, alongside the Fed's decision to leave rates at 3.75%-4.00%, narrowed the Fed's rate advantage by a quarter-point in a single session. During the five-minute bar covering the BoC announcement, USD/CAD crossed 1.4050 in both directions. The subsequent decline following the Fed statement halted above the low recorded before either decision, leaving the pair trading below 1.4050.

Aimed at preventing high energy prices from feeding into other prices, the BoC's first rise since July 2023 reduces the Fed's rate advantage to 1.25-1.50 points. In its Monetary Policy Report (MPR), the BoC lifted its inflation projection for 2027 from 2.0% to 3.1%, with a return to near 2% not expected until mid-2028. According to BoC Senior Deputy Governor Rogers, there was broad agreement among policymakers that inflation risks had increased.

The rate remains low enough to avoid holding back growth, BoC Governor Macklem said. The report also increased the growth projection for 2026 from 0.7% to 1.0%. While signalling that another rise may be necessary, the BoC said it would act cautiously. TD Economics forecasts one further increase to 2.75%, a move that would narrow the Fed's current rate advantage to 1.00-1.25 points.

Growth and inflation releases precede December decisions

An advance estimate of 0.2% growth provides the benchmark for Statistics Canada's August Gross Domestic Product (GDP) release, due at 12:30 GMT on Friday. A day earlier, at the same time of 12:30 GMT, the US releases third-quarter growth figures and September's Personal Consumption Expenditures Price Index (PCE). Both sets of releases will inform the next policy decisions, with the Fed and the BoC each scheduled to announce theirs on 9 December.

With the BoC having already acted, Fed Chair Warsh is due to take questions from reporters at 18:30 GMT on Wednesday. At the International Monetary Fund (IMF) meetings on 16 October, he said other central banks shared his concern over high inflation. His remarks on December will have a bearing on whether the Fed's rate advantage over the BoC widens again on 9 December.

USD/CAD holds in the lower half of its intraday range

Wednesday's trading range extends from just above 1.4000 to just below 1.4100. The session high came before the decline leading into the BoC announcement. Following that release, USD/CAD has remained in the lower half of the range, while intraday momentum moved towards overbought territory ahead of the Fed decision.

USD/CAD chart: 5-minute timeframe