Fed rate hold leaves Canadian Dollar little changed after BoC hike

• 1.4050 is the pivot for USD/CAD. The pair whipsaws after the BoC hike but shows little reaction to the Fed hold.
• 2.50% is the BoC's new rate, up from 2.25% in its first increase since July 2023.
• 0.2% is Statistics Canada's estimate for August GDP, with Canada's release due Friday.

2.50% is the Bank of Canada's (BoC) new policy rate. Wednesday's increase, alongside the Fed's decision to leave rates at 3.75%-4.00%, narrowed the Fed's rate advantage by a quarter-point in a single session. In the five-minute bar covering the BoC announcement, USD/CAD crossed 1.4050 in both directions. A subsequent decline following the Fed statement held above the low reached before either decision. The pair is now below 1.4050.

Aimed at preventing elevated energy costs from feeding through to other prices, the BoC's first hike since July 2023 leaves the Fed's rate advantage at 1.25-1.50 points. In its Monetary Policy Report (MPR), the BoC lifted its 2027 inflation projection from 2.0% to 3.1%. Inflation is not projected to return close to 2% until mid-2028. According to BoC Senior Deputy Governor Rogers, policymakers broadly agreed that inflation risks had increased.

Although rates have risen, BoC Governor Macklem said they remain low enough not to constrain growth. The same report upgraded the 2026 growth projection from 0.7% to 1.0%. Further tightening may be necessary, the BoC said, while stressing that it would move cautiously. One additional increase to 2.75% is expected by TD Economics. That would narrow the Fed's current rate advantage to 1.00-1.25 points.

0.2% GDP Estimate in Focus Ahead of Friday's Release

At 12:30 GMT on Friday, Statistics Canada will release August Gross Domestic Product (GDP), following its preliminary estimate of 0.2% growth. Due a day earlier at the same time, 12:30 GMT, are US third-quarter growth figures and September's Personal Consumption Expenditures Price Index (PCE). These releases will inform the next policy decisions from both the Fed and the BoC, scheduled for 9 December.

With the BoC's decision already announced, Fed Chair Warsh takes questions from reporters at 18:30 GMT on Wednesday. At the International Monetary Fund (IMF) meetings on 16 October, he said other central banks shared his concerns over high inflation. His comments on December will have a bearing on whether the Fed's rate advantage over the BoC expands again on 9 December.

1.4000-1.4100: USD/CAD Holds in Lower Half of Range

Wednesday's trading range extends from just above 1.4000 to just below 1.4100. The session high came before the decline leading into the BoC announcement. Since the announcement, USD/CAD has remained in the lower half of that range. Intraday momentum moved towards overbought territory ahead of the Fed decision.

5-minute USD/CAD chart