Canadian Dollar struggles as Fed and BoC policy outlooks diverge

Source Fxstreet
  • USD/CAD recovers from intraday lows as the US Dollar rebounds.
  • Weak Canadian employment data and diverging central bank expectations weigh on the Canadian Dollar.
  • Traders await US inflation data for fresh clues on the Federal Reserve's interest rate outlook.

USD/CAD trims part of its earlier decline on Monday as the US Dollar (USD) regains ground after opening the week lower. The Canadian Dollar (CAD) struggles to attract buyers as differing monetary policy expectations for the Federal Reserve (Fed) and the Bank of Canada (BoC) favour the Greenback. At the time of writing, USD/CAD trades around 1.4265, recovering from an intraday low of 1.4240.

Friday’s Canadian employment report showed a second consecutive monthly decline in hiring. The economy lost 68.3K jobs in September, against expectations of a 7K increase, while the Unemployment Rate rose to 6.5% from 6.4%.

The weaker labour market and underlying inflation near the BoC’s 2% target limit the scope for policymakers to raise interest rates. The Canadian policy rate stands at 2.25%, below the Fed’s 3.75%-4.00% range, leaving a gap of 150-175 basis points (bps) in favour of the US Dollar. Bond yields also favour the Greenback. Canada’s two-year government bond yield stands near 3.18%, compared with 4.79% for its US counterpart.

According to TD Securities, the Bank of Canada is likely to keep policy steady for an extended period, with economists expecting the central bank “to stay on hold at 2.25% through 2026 before a return to neutral (2.75%) next year, with 25bp hikes in January and March 2027.” The bank notes that “markets have moved to price in more tightening after the Bank expressed more concern over inflation risks at its September policy decision,” but argues that, “without more evidence of higher oil prices broadening into underlying inflation we believe the BoC can remain patient as excess supply is gradually absorbed.”

Meanwhile, the US Dollar remains firm across major currencies, supported by expectations of further Fed tightening and elevated Treasury yields. Higher energy costs linked to the Middle East war keep inflation risks in focus, while efforts to reach a US-Iran agreement remain difficult.

The US Dollar Index (DXY), which tracks the Greenback against six major currencies, trades around 102.43 after touching an intraday low of 102.10, hovering near levels last seen in April 2025.

Traders now look ahead to September’s US Consumer Price Index (CPI) report on Wednesday, followed by the Producer Price Index (PPI) on Thursday. The releases could reshape interest rate expectations ahead of the Fed’s October 27-28 meeting, where traders widely expect the central bank to leave rates unchanged.

Stronger-than-expected inflation could revive bets on an October increase, while softer readings would strengthen the case for waiting until December. Stronger-than-expected inflation could revive bets on an October increase, while softer readings would reinforce expectations of a pause this month and shift attention to December. Traders currently price around an 85% probability of a rate hike by December, according to the CME FedWatch Tool.

Economic Indicator

Consumer Price Index (YoY)

Inflationary or deflationary tendencies are measured by periodically summing the prices of a basket of representative goods and services and presenting the data as The Consumer Price Index (CPI). CPI data is compiled on a monthly basis and released by the US Department of Labor Statistics. The YoY reading compares the prices of goods in the reference month to the same month a year earlier.The CPI is a key indicator to measure inflation and changes in purchasing trends. Generally speaking, a high reading is seen as bullish for the US Dollar (USD), while a low reading is seen as bearish.

Read more.

Next release: Wed Oct 14, 2026 12:30

Frequency: Monthly

Consensus: 3.7%

Previous: 3.4%

Source: US Bureau of Labor Statistics

The US Federal Reserve (Fed) has a dual mandate of maintaining price stability and maximum employment. According to such mandate, inflation should be at around 2% YoY and has become the weakest pillar of the central bank’s directive ever since the world suffered a pandemic, which extends to these days. Price pressures keep rising amid supply-chain issues and bottlenecks, with the Consumer Price Index (CPI) hanging at multi-decade highs. The Fed has already taken measures to tame inflation and is expected to maintain an aggressive stance in the foreseeable future.

Disclaimer: For information purposes only. Past performance is not indicative of future results.
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