Fed hike sends the Loonie to a six-week low
- USD/CAD runs 48 pips to a six-week high on the Fed decision, short of 1.4000
- Canada's rate has not moved in seven meetings while the Fed's just did
The Fed has raised its rate to 3.75-4.00%, its first increase since 2023 and its first move since the cut in December 2025. The Bank of Canada has not moved at all. Its overnight rate has been 2.25% through seven consecutive meetings, the most recent on September 2, and the next decision is not until October 28. Take the middle of the new American range and the gap between the two widens from 1.375 points to 1.625, which is the mechanism this pair runs on. Canada sells oil into a market where the barrel is above $100, which normally supports the currency. The rate gap is the larger force, and it is the one that moved today. The vote was 12-0 and the projections put the American rate at 4.1% by December and again through 2027. The Bank of Canada published its account of that September 2 decision at 17:30 GMT today, thirty minutes before the Fed moved.
The pair spent eighteen hours inside a band of about 25 pips and then covered twice that in the half hour around the decision. It ran 48 pips off the pre-release level to a high just short of 1.4000 and changes hands four pips under it. The day's low came in the European morning, 62 pips below where the pair now trades, and has not been revisited. The five-minute momentum gauge reads near 72, which is elevated, and every earlier visit to that end of its range this session lasted minutes rather than hours.
USD/CAD 5-minute chart
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
