USD/CAD holds steady above 1.3750 ahead of BoC, Fed rate decisions
- USD/CAD flat lines around 1.3770 in Wednesday’s early Asian session.
- The Fed is widely expected to hold its key interest rate steady
- The Fed and BoC interest rate decisions will be the highlights later on Wednesday.
The USD/CAD pair trades on a flat note near 1.3770 during the early Asian session on Wednesday. Markets might turn cautious later in the day as traders brace for the imminent interest rate decision by the Bank of Canada (BoC) and the US Federal Reserve (Fed).
Bloomberg reported late Tuesday that US Treasury Secretary Scott Bessent said that the US and China will continue talks over maintaining a tariff truce before the deadline in two weeks, and that US President Donald Trump will make the final decision on any extension. Trade negotiations with China have been less certain and this might undermine the US Dollar (USD) against the Canadian Dollar (CAD).
The Fed is widely anticipated to keep its key interest rate unchanged at 4.25% to 4.5%, the same as it has been since December. According to the CME FedWatch tool, Fed Funds futures traders are pricing in nearly a 97% possibility of no change to interest rates at the July meeting.
Traders await the FOMC's policy statement and Fed Chair Jerome Powell's Press Conference afterward, as they might offer some hints about the interest rate outlook in the coming months. The cautious stance from the Fed officials amid the tariff uncertainty might help limit the Greenback’s losses in the near term.
On the Loonie’s front, economists expect the BoC to keep the policy rate at 2.75% at the July meeting later on Wednesday, a third consecutive pause. The Canadian central bank said its decisions would be “less forward looking” due to several “layers of uncertainty” surrounding the trade war.
Interest rates FAQs
Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.
Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.
Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.
The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.
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