Why is the Canadian Dollar struggling to gain traction despite a BoC rate hike?

• The Canadian Dollar finds little support from the BoC rate hike, keeping USD/CAD broadly unchanged.
• Further tightening remains an option as the BoC lifts interest rates by 25 bps to 2.50%.
• Expectations for a December hike take centre stage ahead of the Fed’s interest rate decision.

USD/CAD remains broadly steady in Wednesday’s American session, with the Canadian Dollar (CAD) drawing little support from the widely expected interest rate increase by the Bank of Canada (BoC). Following swings in both directions immediately after the announcement, the pair is trading near 1.4050 at the time of writing.

A 25 basis points (bps) increase took the BoC’s policy rate to 2.50%. Explaining the decision, Governing Council said the move was necessary “to reduce the risk that continuing high energy prices spread broadly to the prices of other goods and services.”

Further rate increases remain possible, with the central bank stating, “There could be a need to increase the policy rate further, but given uncertainties, the Governing Council agreed to proceed carefully.” It also reaffirmed that “the Bank remains committed to maintaining Canadians’ confidence in price stability.”

A return to the 2% inflation target will take longer, according to the revised projections. Consumer Price Index (CPI) inflation is expected by the BoC to climb to around 3.5% by year-end, then average 3% in 2027. That is a percentage point above its July forecast, with inflation subsequently projected to ease to 2% in mid-2028.

The US Dollar remains firm as markets await the Federal Reserve’s (Fed) monetary policy decision at 18:00 GMT. Near 102.40, the US Dollar Index (DXY) is trading close to two-week highs. The index measures the Greenback against a basket of six major currencies.

Following September’s 25-bps increase, policymakers are widely expected to maintain interest rates at 3.75%-4.00%. Inflation risks remain skewed to the upside, putting Fed Chair Warsh’s remarks in focus for signals of a December hike. According to the CME FedWatch Tool, markets assign an 85% probability to such an increase.

If the Fed keeps rates unchanged but retains a hawkish stance, the US Dollar could gain support and lift USD/CAD. Conversely, a less hawkish message could lead traders to pare expectations of a December rate hike, putting pressure on the Greenback.