Why is the Canadian Dollar weakening despite expectations of a BoC rate hike?

• Buying interest lifts USD/CAD towards 1.4010 in early European trading on Monday.
• Wednesday’s Bank of Canada decision is set to bring a rate increase to 2.50%.
• An unchanged Fed rate at the October policy meeting carries a market-implied probability of around 90.6%.

Modest buying interest keeps USD/CAD close to 1.4010 in Monday’s early European session, as weaker crude oil prices put pressure on the commodity-linked Canadian Dollar (CAD) against the US Dollar (USD). Attention is now turning to Wednesday’s interest rate decisions from the US Federal Reserve (Fed) and the Bank of Canada (BoC).

Monday’s decline in oil follows a report that Qatari mediators visited Tehran on Sunday to help ease regional tensions in coordination with the US. With Canada among the major oil-exporting countries, lower crude prices usually 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,"

A majority of 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 another increase by the end of March to head off any further rise in inflation expectations.

Caution among Fed policymakers could put the Greenback under pressure against the CAD. On 16 October, Fed Chair Kevin Warsh said he would avoid prejudging future interest rate decisions.

While New York Fed President John Williams considered one more rate increase this year potentially appropriate, Fed Vice Chair Philip Jefferson and Governor Christopher Waller said further hikes need not be rushed. The CME FedWatch tool currently puts the probability of rates remaining unchanged at the October meeting at 90.6%.

Can improving Canadian sentiment withstand tariffs, inflation and borrowing costs?

Financial markets and labour conditions account for part of the recent improvement in Canadian confidence, according to Rabobank analysts. They attribute “much of the improvement in the CSCE indicator” to a better financial market outlook and “confidence in the labor market.” Yet they warn that the underlying growth backdrop is still fragile. As they put it, “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.”

Persistent price pressures are also evident in inflation 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 challenge. 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 worsening the pressures households already face.

What do Warsh’s investment and AI remarks signal as he avoids rate commitments?

A cautious, data-dependent message puts Fed Chair Warsh’s speech at 5.6/10 on the FXS Speechtracker, moderately below the historical average of 6.1/10. His reference to being “over-scarred from the global financial crisis” points to a continuing emphasis on risk management. At the same time, he highlights structural growth and a surge in investment supported by “good policies,” without prejudging forthcoming FOMC decisions. By presenting AI as both a near-term driver of demand and a means of improving confidence in data, Warsh adds a forward-looking, structurally hawkish element, though he offers no explicit guidance on the Dollar’s direction.

Despite the somewhat softer FXS Speechtracker reading, the wider policy message remains firmly hawkish: the FXS Fed Sentiment Index registered a 0.00-point change, holding at an elevated 127.51. With that reading comfortably above 100, and Warsh emphasising price stability, robust investment and financial stability risks, markets are likely to regard the Dollar as supported by expectations of a continued Fed preference for tighter policy unless the data materially disappoint.

Technical Analysis: Can USD/CAD Break Above the 100-day SMA?

A bearish short-term outlook persists on the USD/CAD daily chart. Trading below both the 100-day simple moving average (SMA) and the Bollinger middle band leaves the pair confined to the lower half of its recent volatility range. At 39, the Relative Strength Index (14) is drifting below the neutral 50 mark, pointing to mild downside pressure rather than outright oversold conditions.

The first upside hurdle is the 100-day SMA around 1.4045, ahead of the Bollinger middle band at 1.4170. A broader threshold for bullish momentum lies at the Bollinger upper band of 1.4355. Below current levels, the Bollinger lower band near 1.3985 provides immediate support; 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.)