Canadian Dollar slips from six-week high as Fed, BoC rate decisions draw closer

• A recovery in the US Dollar lifts USD/CAD off a six-week low, ending seven consecutive days of losses.
• Diverging policy expectations are in focus as traders prepare for Wednesday's Fed and BoC decisions.
• Key US economic data and Canada's GDP release are also on traders' radar for later this week.

A rebound in USD/CAD on Monday ends seven straight days of declines, with traders adjusting positions before this week’s monetary policy announcements from the Federal Reserve (Fed) and Bank of Canada (BoC). The pair is trading near 1.4023 at the time of writing, having touched 1.3969 on Friday, its lowest level since 16 September.

Recovering from last week’s low of 101.45, the US Dollar Index (DXY) is trading near 101.87. The index measures the Greenback against a basket of six major currencies.

Different policy outcomes are expected when the BoC and Fed deliver their interest rate decisions on Wednesday. A 25-basis-point increase is anticipated from the Canadian central bank, which would be its first hike since July 2023. The Fed, however, is expected to hold rates steady following a 25 basis points increase in September.

Updated growth and inflation projections will accompany the Canadian central bank’s quarterly Monetary Policy Report. According to recent remarks from BoC Governor Tiff Macklem, persistently elevated energy prices would prompt a substantial upward revision to the bank’s inflation forecasts. As markets already expect a BoC rate increase and a Fed pause, policymakers’ comments will be closely examined for indications of when further hikes could come and how quickly rates could rise.

A policy stance that differs from those of its major peers leaves the Canadian Dollar “likely to receive some support from monetary policy, at least in the short term,” according to analysts at Commerzbank. Their economists, they point out, “expect both the Fed and the ECB to tighten less than the market is currently pricing in.” For Canada, however, the analysts say that, “given the BoC’s recent hawkish comments, the risk of higher inflation expectations and the prospect of higher BoC inflation forecasts, the BoC could raise rates more than once by the end of next year,” highlighting a relatively more aggressive policy trajectory that could support CAD.

This week’s economic calendar will also draw traders’ attention alongside the central bank announcements. Tuesday brings the US ADP Employment Change four-week average, Durable Goods Orders, Consumer Confidence and New Home Sales. The US Personal Consumption Expenditure (PCE) report, third-quarter Gross Domestic Product (GDP) and weekly Initial Jobless Claims follow on Thursday. Canada’s August GDP figures are scheduled for Friday.