USD/CAD holds gains at 1.3770 ahead of the Fed and BoC decisions

The US Dollar holds gains against a weaker Loonie, following a four-day rally.
Later on, the day US ADP employment and the preliminary GDP figures will frame the Fed's decision.
The Bank of Canada is expected to stand pat, but recent data points to more easing before the year-end.

Guillermo Alcala FXStreet

The Greenback steadies near recent highs against the Canadian Dollar following a four-day rally, with investors watching from the sidelines ahead of the monetary policy decisions by the Federal Reserve and the Bank of Canada due later on the day.

The pair is trading right above 1.3770 during Wednesday’s early European session, consolidating gains after rallying nearly 1.5% from last week's lows at 1.3575. Strong US macroeconomic data and the trade deals between the US and some of its major trade partners have restored confidence in the US Dollar.

US ADP employment and GDP will frame the Fed’s decision

US JOLTS Job Openings data suggested that the labour market is cooling, and investors will be looking at the ADP report, due later on the day, to confirm that view.

Also on Wednesday, the Preliminary US GDP is expected to show that the US economy experienced a significant recovery, showing a 2.4% annualised growth after the 0.5% contraction seen in the previous quarter.

Suppose these figures are confirmed and the ADP meets market forecasts and shows a significant rebound in June. In that case, the Fed might have further reasons to keep interest rates unchanged until the economic consequences of Trump's tariffs are evident.

The Bank of Canada is also expected to leave rates on hold, but the fundamental background is quite different in this case. Inflation remains below the 2% level, and the labour market has softened, which might prompt the bank to deliver a “dovish hold” that would increase negative pressure on the Loonie.

Economic Indicator

Fed Interest Rate Decision

The Federal Reserve (Fed) deliberates on monetary policy and makes a decision on interest rates at eight pre-scheduled meetings per year. It has two mandates: to keep inflation at 2%, and to maintain full employment. Its main tool for achieving this is by setting interest rates – both at which it lends to banks and banks lend to each other. If it decides to hike rates, the US Dollar (USD) tends to strengthen as it attracts more foreign capital inflows. If it cuts rates, it tends to weaken the USD as capital drains out to countries offering higher returns. If rates are left unchanged, attention turns to the tone of the Federal Open Market Committee (FOMC) statement, and whether it is hawkish (expectant of higher future interest rates), or dovish (expectant of lower future rates).

Economic Indicator

BoC Interest Rate Decision

The Bank of Canada (BoC) announces its interest rate decision at the end of its eight scheduled meetings per year. If the BoC believes inflation will be above target (hawkish), it will raise interest rates in order to bring it down. This is bullish for the CAD since higher interest rates attract greater inflows of foreign capital. Likewise, if the BoC sees inflation falling below target (dovish) it will lower interest rates in order to give the Canadian economy a boost in the hope inflation will rise back up. This is bearish for CAD since it detracts from foreign capital flowing into the country.

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