Canadian Dollar weakens as US CPI puts October Fed hike in play

• USD/CAD rises 0.50% as the US Dollar climbs following hotter-than-expected US inflation data.
• Rising US Treasury yields and Fed interest rate-hike expectations support the Greenback.
• Diverging Fed-BoC policy outlooks remain a key headwind for the Loonie.

USD/CAD climbs on Wednesday, reversing all of the previous day’s losses as the US Dollar (USD) rallies to a fresh year-to-date high following stronger-than-expected US inflation data. At the time of writing, USD/CAD trades around 1.4287, up 0.50% on the day near 18-month highs.

The September Consumer Price Index (CPI) rises 0.6% monthly, matching expectations and picking up from August’s 0.4% increase. Annual headline inflation climbs to 3.7% from 3.4%, exceeding the 3.6% forecast.

Core CPI, which excludes food and energy, increases 0.3% monthly, above the 0.2% expected and unchanged from August. The annual core rate rises to 2.6% from 2.4%, also beating the 2.5% forecast.

The report gives the Federal Reserve (Fed) less reassurance that inflation is moving toward its 2% target, particularly as elevated Oil prices linked to Middle East tensions keep inflation risks tilted to the upside.

Traders now assign around a 50% chance of a rate hike at the Fed’s October 27-28 meeting, up from 22% before the release, while the probability of a December increase rises to roughly 95%, according to the CME FedWatch Tool. Traders next look to US Producer Price Index (PPI) and retail sales figures due on Thursday.

Expectations of further Fed tightening after September’s 25-basis-point rate hike underpin broad demand for the US Dollar and keep US Treasury yields near multi-year highs. The US Dollar Index (DXY), which tracks the Greenback against six major currencies, climbs toward 102.80, its strongest level since April 2025. Meanwhile, the benchmark 10-year US Treasury yield rises toward 5.30%, after falling below 5.20% earlier this week.

Recent Fed comments show policymakers remain concerned about inflation. Boston Fed President Susan Collins said on Tuesday she expects “inflation to stay above 2% due to high energy prices.” Collins added that the “future path of monetary policy in new year will depend on data.”

Fed rate-hike expectations remain a key headwind for the Canadian Dollar. The Bank of Canada (BoC) has kept interest rates unchanged at 2.25% so far this year, leaving US rates 150-175 basis points (bps) above the Canadian policy rate. Further Fed tightening could widen that gap, while underlying inflation is near its 2% target and a weakening labour market gives the BoC little reason to raise rates soon.