Canadian Dollar eases despite expectations of a BoC rate hike

• Around 1.4010, USD/CAD edges higher in early European trading on Monday.
• Wednesday is set to bring a Bank of Canada rate increase to 2.50%.
• An unchanged Fed rate at the October policy meeting carries a market-implied probability of around 90.6%.

With USD/CAD near 1.4010, the pair posts modest gains in Monday’s early European session as weaker crude oil prices put pressure on the commodity-linked Canadian Dollar (CAD) against the US Dollar (USD). Attention is turning to Wednesday’s interest rate announcements from the US Federal Reserve (Fed) and the Bank of Canada (BoC).

A report that Qatari mediators visited Tehran on Sunday to help ease regional tensions in coordination with the US has been followed by a decline in oil prices on Monday. As Canada is a major oil exporter, cheaper crude generally weighs on the Loonie.

Vandana Hari, founder of oil market analysis provider Vanda Insights, said: "Concerns over renewed military hostilities in the Middle East, which drove much of last week’s crude rally, have eased this morning, but the reprieve may prove temporary,"

A majority of economists surveyed by Reuters expect the BoC to lift its overnight rate by 25 basis points (bps) to 2.50% at Wednesday’s October policy meeting. They anticipate another increase by the end of March to head off any further rise in inflation expectations.

Caution among Fed officials could weigh on the Greenback relative to the CAD. Speaking on 16 October, Fed Chair Kevin Warsh said he would not prejudge future interest rate decisions.

Although New York Fed President John Williams indicated that one further rate rise this year could be appropriate, Fed Vice Chair Philip Jefferson and Governor Christopher Waller said there was no urgency to deliver additional increases. The CME FedWatch tool now puts the probability of rates remaining unchanged at the October meeting at 90.6%.

Canadian confidence strengthens as tariffs, inflation and borrowing costs weigh on prospects

Financial markets and labour conditions account for part of the recent improvement in Canadian confidence, according to Rabobank analysts. They attribute “much of the improvement in the CSCE indicator” to a better financial market outlook and “confidence in the labor market.” Even so, the analysts warn that the underlying growth outlook is fragile. They argue that “US tariffs pose a risk to Canadian manufacturing and could reverse some of the improvement in the goods-producing sector,” adding that “investment in Canada has had a weak post-pandemic recovery, and elevated trade tensions continue to weigh on businesses’ capital expenditures and hiring plans.”

Persistent price pressures are also evident in inflation expectations. Rabobank observes that “consumer short- and medium-term inflation expectations have recently converged with climbing five-year expectations to a level which remains well above the Bank of Canada’s 2% target,” highlighting the challenge. In these circumstances, the bank cautions that “higher borrowing costs would only add to the strain on households already facing elevated prices, rather than materially improving the cost of living for Canadian consumers,” implying little room for tighter policy without adding to households’ existing financial pressures.

Warsh highlights investment surge and AI while withholding rate commitments

At 5.6/10 on the FXS Speechtracker, Fed Chair Warsh’s speech comes in modestly below the historical average of 6.1/10, indicating a cautious approach guided by incoming data. His reference to being “over-scarred from the global financial crisis” points to a continuing preference for risk management. That caution sits alongside his emphasis on structural growth and a surge in investment fuelled by “good policies,” as he declines to prejudge forthcoming FOMC decisions. By presenting AI as both a near-term source of demand and a means of improving confidence in data, Warsh adds a forward-looking, structurally hawkish dimension, without offering explicit direction for the Dollar.

Despite the slightly softer FXS Speechtracker reading, the broader policy message remains firmly hawkish: the FXS Fed Sentiment Index registered a 0.00-point move, leaving it unchanged at an elevated 127.51. The index remains well above 100, while Warsh’s focus on price stability, strong investment and financial stability risks is likely to lead markets to view the Dollar as supported by expectations of a continued Fed preference for tighter policy, unless the data prove materially disappointing.

Technical Analysis: USD/CAD stays below the 100-day SMA

Below both the 100-day simple moving average (SMA) and the Bollinger middle band, USD/CAD retains a bearish near-term bias on the daily chart. The pair remains confined to the lower half of its recent volatility envelope. A Relative Strength Index (14) reading of 39, drifting below the neutral 50 threshold, points to mild downside pressure rather than outright oversold conditions.

The 100-day SMA near 1.4045 provides the first resistance level, ahead of the Bollinger middle band at 1.4170. Further up, the Bollinger upper band at 1.4355 represents a broader threshold for a bullish move. Immediate support lies around 1.3985 at the Bollinger lower band; a sustained break below it would likely prolong the correction towards lower daily lows.

(The technical analysis of this story was written with the help of an AI tool. Know more.)