USD/CAD trades flat after BoC keeps rates unchanged, Fed decision in focus
- USD/CAD holds steady after the Bank of Canada keeps rates unchanged at 2.25%.
- US Dollar rebounds modestly after comments from US officials help steady sentiment.
- Focus shifts to the Fed’s interest rate decision and Chair Jerome Powell’s guidance.
The Canadian Dollar (CAD) holds firm against the US Dollar (USD) on Wednesday, as traders digest a largely uneventful Bank of Canada (BoC) interest decision. At the time of writing, USD/CAD is trading around 1.3570, with attention now turning to the Federal Reserve’s (Fed) interest rate decision due at 19:00 GMT.
The BoC left its benchmark interest rate unchanged at 2.25%, in line with market expectations, and offered little in the way of fresh guidance. In its Monetary Policy Statement, the BoC said monetary policy remains focused on keeping inflation close to the 2% target while helping the economy navigate a period of structural adjustment. Governing Council judged that the current policy rate “remains appropriate.”
However, officials stressed that uncertainty is heightened, that risks are being monitored closely, and that the central bank stands ready to respond if the outlook changes.
The accompanying Monetary Policy Report underscored that the Canadian economy continues to face headwinds from elevated trade uncertainty and US tariffs, while growth is expected to remain modest. The BoC now expects Gross Domestic Product (GDP) to rise by 1.1% in 2026 and 1.5% in 2027.
On inflation, policymakers forecast CPI to average 2% in 2026, slightly below the previous 2.1% estimate, and 2.1% in 2027, unchanged from the October outlook.
Despite the muted BoC outcome, USD/CAD found some support as the US Dollar staged a modest rebound across the board. The Greenback drew fresh bids after comments from US officials helped stabilize sentiment following recent heavy selling.
US Treasury Secretary Scott Bessent said the United States maintains a "strong Dollar" policy. Bessent also said Washington is "absolutely not" intervening in the Dollar-Yen pair at present. The comments came a day after President Donald Trump said he is not concerned about the recent decline in the US Dollar.
The US Dollar Index (DXY), which tracks the Greenback against a basket of six major currencies, is trading around 96.40, rebounding modestly after hitting a four-year low of 95.56 on Tuesday.
Looking ahead, market focus now shifts squarely to the Fed’s interest rate decision. While no change in rates is expected, traders will closely watch Chair Jerome Powell’s tone and guidance for clues on the timing and pace of potential cuts later this year.
Bank of Canada FAQs
The Bank of Canada (BoC), based in Ottawa, is the institution that sets interest rates and manages monetary policy for Canada. It does so at eight scheduled meetings a year and ad hoc emergency meetings that are held as required. The BoC primary mandate is to maintain price stability, which means keeping inflation at between 1-3%. Its main tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger Canadian Dollar (CAD) and vice versa. Other tools used include quantitative easing and tightening.
In extreme situations, the Bank of Canada can enact a policy tool called Quantitative Easing. QE is the process by which the BoC prints Canadian Dollars for the purpose of buying assets – usually government or corporate bonds – from financial institutions. QE usually results in a weaker CAD. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The Bank of Canada used the measure during the Great Financial Crisis of 2009-11 when credit froze after banks lost faith in each other’s ability to repay debts.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the Bank of Canada purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the BoC stops buying more assets, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Canadian Dollar.
Author
Vishal Chaturvedi
FXStreet
I am a macro-focused research analyst with over four years of experience covering forex and commodities market. I enjoy breaking down complex economic trends and turning them into clear, actionable insights that help traders stay ahead of the curve.
