USD/CAD edges higher above 1.4300 as Fed holds rates steady, eyes on BoC’s Macklem speech

USD/CAD gains ground to around 1.4320 in Wednesday’s late American session.
The Fed kept its benchmark federal funds rate in a range of 4.25%-4.5% at its March meeting on Wednesday.
Traders brace for the BoC's Governor Macklem speech.

Lallalit Srijandorn FXStreet

The USD/CAD pair gathers strength to around 1.4320 during the late American session on Wednesday. The Greenback edges higher against the Canadian Dollar (CAD) as the Federal Reserve (Fed) held the interest rate steady at the March meeting, as expected. The Bank of Canada (BoC) Governor Tiff Macklem is scheduled to speak later on Thursday about tariff-related uncertainty.

The US central bank decided to hold its benchmark interest rate steady for a second straight meeting on Wednesday amid mounting concerns that the economy is slowing and inflation could remain stubbornly high. Fed Chair Jerome Powell emphasized the high degree of uncertainty from US President Donald Trump’s significant policy changes, adding that the Fed officials can wait for more clarity on the impact of those policies on the economy before acting.

New economic projections indicated that Fed officials marked down their forecasts for growth this year, but they still see another half percentage point of rate cuts through 2025. The more hawkish remarks from Fed officials on rates from December provide some support to the US Dollar (USD) broadly.

On the other hand, a rebound in Crude Oil prices amid the rising geopolitical tensions in the Middle East could boost the commodity-linked Loonie and create a headwind for USD/CAD. It’s worth noting that Canada is the largest oil exporter to the United States (US), and higher crude oil prices tend to have a positive impact on the CAD value.

Canadian Dollar FAQs

What key factors drive the Canadian Dollar?

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.

How do the decisions of the Bank of Canada impact 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.

How does the price of Oil impact the Canadian Dollar?

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.

How does inflation data impact the value of the Canadian Dollar?

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.

How does economic data influence the value of 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.

Author

Lallalit Srijandorn

FXStreet

Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.

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