Canadian Dollar strengthens as BoC delivers rate hike, US PCE data in focus
- USD/CAD softens to around 1.3975 in Thursday’s early Asian session.
- The BoC raised interest rates for the first time in more than three years.
- The Fed kept its benchmark interest rate at current levels in October.
The USD/CAD pair loses ground to near 1.3975 during the early Asian trading hours on Thursday. The Canadian Dollar (CAD) strengthens against the US Dollar (USD) after the Bank of Canada (BoC) delivers a rate hike. Traders will keep an eye on the preliminary reading of the US Gross Domestic Product (GDP) for the third quarter (Q3) and Personal Consumption Expenditures (PCE) inflation data for September, which are due on Thursday.
The BoC decided to raise its benchmark overnight interest rate by 25 basis points (bps) to 2.50% at its October policy meeting on Wednesday. Governor Tiff Macklem said additional rate hikes might be necessary, although policymakers would proceed cautiously given uncertainty surrounding the economic outlook.
According to the BoC statement, "Given the ongoing resilience of the global economy, the Bank has revised up global GDP growth slightly to 3.1% in 2026, while growth in 2027 and 2028 remains unchanged from the July projection at 3.2%.
Oil prices rise on Thursday amid renewed concerns over energy supply disruptions in the Middle East. Yemen's Iran-aligned Houthis attacked Aden airport on Wednesday after the Iran-aligned group warned people to evacuate the facility, per Reuters. On Tuesday, the Houthis said that they had launched a ballistic missile toward the Ras Tanura oil refinery in eastern Saudi Arabia, the kingdom’s largest refinery.
It is worth noting that Canada is a major oil-exporting country, and high crude oil prices generally have a positive impact on the Loonie.
As widely expected, the Federal Reserve (Fed) held its benchmark federal funds rate in a range of 3.75% to 4.00% on Wednesday.
The US central bank acknowledged inflation 'remains elevated,' upgrading its assessment of the economy, signaling that further hikes may come depending on the performance of inflation.
BoC hike expectations build but banks doubt scope for sustained CAD gains
Analysts at BBH highlight that underlying inflation is running close to the Bank of Canada’s projections, noting that “the average of CPI trim and median was 1.85% y/y in September, tracking just below the BoC’s 2.0% Q3 projection.” They add that “the pick-up in firm’s one- and two-year inflation expectations could lift the core CPI outlook, reinforcing the case for further hikes.” BBH also expects the BoC to revise its projections higher, arguing that “the BoC will likely raise its inflation and real GDP forecast, which can underpin CAD,” as “September headline CPI printed at 3.1% y/y, exceeding the bank’s 2.5% Q3 projection, while Q2 real GDP grew 3.3% annualized vs. the bank’s 2.5% projection.”
Warsh underscores unwavering 2% inflation goal, keeping Dollar bulls engaged
Warsh’s press conference tone is firmly hawkish, with the 7/10 FXS Speechtracker score in line with the established baseline, underscoring continuity rather than a regime shift. By stressing that “ensuring price stability is not about a fixed date on a calendar” and highlighting “new monetary medicine” plus the September removal of accommodation, the message is that policy will remain data-driven and resolutely focused on quashing inflation, even as inflation expectations are said to be “going the right way.” Repeated assurances of “no ifs and or buts, we will deliver price stability” and a hard 2% PCE target, alongside acknowledgement that interest rates are biting in technology and CAPEX, reinforce a narrative of ongoing restrictive policy that is supportive for the Dollar and keeps risk assets sensitive to further tightening signals.
The FXS Fed Sentiment Index jumped by +14.39 points to 141.89, a clear move deeper into hawkish territory and consistent with the steady 7/10 tone captured by the FXS Speechtracker. With the index far above the neutral 100 line, markets are likely to interpret Warsh’s emphasis on effective “monetary medicine” and unwavering commitment to the 2% PCE target as validation of a higher-for-longer rate path, a backdrop that typically underpins the Dollar while posing headwinds for high-beta FX and rate‑sensitive assets.
Technical Analysis: USD/CAD retains a bearish tone below the 100-day SMA
In the daily chart, USD/CAD keeps a bearish near-term tone as spot holds beneath the 100-day simple moving average (SMA) and the Bollinger middle band. The pair is retreating from the upper half of the recent Bollinger envelope, while the Relative Strength Index (14) at 38.5 leans toward weak momentum rather than outright oversold conditions, hinting that sellers still have the upper hand but downside traction is moderating.
On the topside, initial resistance emerges at the 100-day SMA near 1.4045, followed by the Bollinger middle band at 1.4140 and then the upper band toward 1.4350, where a break would be needed to ease the current bearish pressure. On the downside, the first notable support sits at the Bollinger lower band around 1.3930, and a clear move beneath this floor would open the path for an extension of the corrective leg in the coming sessions.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
Canadian Dollar FAQs
The key factors driving the Canadian Dollar (CAD) are the level of interest rates set by the Bank of Canada (BoC), the price of Oil, Canada’s largest export, the health of its economy, inflation and the Trade Balance, which is the difference between the value of Canada’s exports versus its imports. Other factors include market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – with risk-on being CAD-positive. As its largest trading partner, the health of the US economy is also a key factor influencing the Canadian Dollar.
The Bank of Canada (BoC) has a significant influence on the Canadian Dollar by setting the level of interest rates that banks can lend to one another. This influences the level of interest rates for everyone. The main goal of the BoC is to maintain inflation at 1-3% by adjusting interest rates up or down. Relatively higher interest rates tend to be positive for the CAD. The Bank of Canada can also use quantitative easing and tightening to influence credit conditions, with the former CAD-negative and the latter CAD-positive.
The price of Oil is a key factor impacting the value of the Canadian Dollar. Petroleum is Canada’s biggest export, so Oil price tends to have an immediate impact on the CAD value. Generally, if Oil price rises CAD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Oil falls. Higher Oil prices also tend to result in a greater likelihood of a positive Trade Balance, which is also supportive of the CAD.
While inflation had always traditionally been thought of as a negative factor for a currency since it lowers the value of money, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Higher inflation tends to lead central banks to put up interest rates which attracts more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in Canada’s case is the Canadian Dollar.
Macroeconomic data releases gauge the health of the economy and can have an impact on the Canadian Dollar. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the CAD. A strong economy is good for the Canadian Dollar. Not only does it attract more foreign investment but it may encourage the Bank of Canada to put up interest rates, leading to a stronger currency. If economic data is weak, however, the CAD is likely to fall.
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