Canadian Dollar eases from six-week high ahead of Fed, BoC interest rate decisions

USD/CAD rebounds on Monday, snapping a seven-day losing streak as traders reposition ahead of this week’s Federal Reserve (Fed) and Bank of Canada (BoC) monetary policy announcement. At the time of writing, the pair trades around 1.4023 after falling to 1.3969 on Friday, its weakest level since September 16.

The US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, trades around 101.87, recovering from last week’s low of 101.45.

The BoC and Fed announce their interest rate decisions on Wednesday and are expected to take different paths. Traders anticipate a 25-basis-point hike from the Canadian central bank, which would mark its first rate increase since July 2023. In contrast, the Fed is expected to pause after raising rates by 25 basis points in September.

The Canadian central bank will also publish its quarterly Monetary Policy Report, providing updated growth and inflation projections. BoC Governor Tiff Macklem recently said persistently high energy prices would lead to a significant upward revision to the bank’s inflation forecasts. With markets already anticipating a BoC hike and a Fed pause, traders will scrutinise policymakers’ remarks for clues about the timing and pace of further interest rate increases.

Analysts at Commerzbank argue that the Canadian Dollar is “likely to receive some support from monetary policy, at least in the short term,” as the Bank of Canada’s stance diverges from its major peers. They note that their economists “expect both the Fed and the ECB to tighten less than the market is currently pricing in.” By contrast, they highlight 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,” underscoring a comparatively more aggressive policy path that could underpin CAD.

Beyond the central bank decisions, traders also await key economic releases this week. On Tuesday, the US will release the ADP Employment Change four-week average, Durable Goods Orders, Consumer Confidence and New Home Sales. On Thursday, attention will turn to the US Personal Consumption Expenditure (PCE) report, third-quarter Gross Domestic Product (GDP) and weekly Initial Jobless Claims. In Canada, August GDP data is due on Friday.