Can the Canadian Dollar hold its gains after BoC rate hike as US PCE data takes centre stage?

• USD/CAD edges lower towards 1.3975 in early Asian trade on Thursday.
• For the first time in more than three years, the BoC increased interest rates.
• October saw the Fed leave its benchmark interest rate unchanged.

The Canadian Dollar (CAD) gains against the US Dollar (USD), pushing USD/CAD down towards 1.3975 in Thursday’s early Asian trade following a rate increase by the Bank of Canada (BoC). Attention now turns to Thursday’s preliminary US Gross Domestic Product (GDP) reading for the third quarter (Q3), alongside September’s Personal Consumption Expenditures (PCE) inflation data.

A 25 basis points (bps) increase at Wednesday’s October policy meeting took the BoC’s benchmark overnight interest rate to 2.50%. While Governor Tiff Macklem indicated that further rate increases might be needed, he said policymakers would move cautiously amid uncertainty over the economic outlook.

The BoC’s statement said: "Given the ongoing resilience of the global economy, the Bank has revised up global GDP growth slightly to 3.1% in 2026, while growth in 2027 and 2028 remains unchanged from the July projection at 3.2%."

Fresh worries about disruptions to Middle Eastern energy supplies lift oil prices on Thursday. Reuters reported that Yemen's Iran-aligned Houthis attacked Aden airport on Wednesday, after the group had warned people to leave the facility. A day earlier, on Tuesday, the Houthis said they had fired a ballistic missile towards the Ras Tanura oil refinery in eastern Saudi Arabia, the kingdom’s largest refinery.

With Canada being a major oil exporter, higher crude prices are generally supportive of the Loonie.

Wednesday’s Federal Reserve (Fed) decision left the benchmark federal funds rate within the 3.75% to 4.00% range, in line with widespread expectations.

Alongside an improved assessment of the economy, the US central bank noted that inflation 'remains elevated,' indicating that additional rate increases may follow depending on how inflation evolves.

Can rising BoC hike expectations translate into sustained CAD gains? Banks remain doubtful

Underlying inflation remains close to the Bank of Canada’s forecasts, according to BBH analysts, who point out that “the average of CPI trim and median was 1.85% y/y in September, tracking just below the BoC’s 2.0% Q3 projection.” In their view, “the pick-up in firm’s one- and two-year inflation expectations could lift the core CPI outlook, reinforcing the case for further hikes.” Higher BoC projections are also expected by BBH: “the BoC will likely raise its inflation and real GDP forecast, which can underpin CAD,” given that “September headline CPI printed at 3.1% y/y, exceeding the bank’s 2.5% Q3 projection, while Q2 real GDP grew 3.3% annualized vs. the bank’s 2.5% projection.”

Will Warsh’s firm 2% inflation commitment keep Dollar bulls interested?

Dollar bulls remain engaged as Warsh maintains a distinctly hawkish stance at the press conference. His 7/10 FXS Speechtracker score matches the established baseline, suggesting policy continuity rather than a change in regime. The emphasis on “ensuring price stability is not about a fixed date on a calendar”, together with references to “new monetary medicine” and September’s withdrawal of accommodation, conveys a policy approach guided by data and firmly committed to containing inflation. That remains the message even as inflation expectations are described as “going the right way.” Repeated pledges of “no ifs and or buts, we will deliver price stability”, a firm 2% PCE target and recognition that interest rates are weighing on technology and CAPEX strengthen the case for continued restrictive policy. This supports the Dollar while leaving risk assets sensitive to any further signals of tightening.

A +14.39-point surge took the FXS Fed Sentiment Index to 141.89, moving it decisively further into hawkish territory and aligning with the sustained 7/10 reading from the FXS Speechtracker. The index remains well above its neutral 100 mark. Markets are therefore likely to view Warsh’s stress on effective “monetary medicine” and his firm commitment to the 2% PCE target as confirmation that rates will stay higher for longer. Such a setting generally favours the Dollar but creates challenges for high-beta FX and rate-sensitive assets.

Technical Analysis: Can USD/CAD shake off its bearish bias below the 100-day SMA?

Sellers retain the near-term advantage on the daily USD/CAD chart, with spot trading below both the 100-day simple moving average (SMA) and the Bollinger middle band. A retreat from the upper half of the recent Bollinger envelope accompanies a Relative Strength Index (14) reading of 38.5. That reading points to subdued momentum rather than outright oversold conditions, suggesting that although sellers remain in control, the downward move is losing some traction.

The Bollinger lower band around 1.3930 provides the first significant downside support. A decisive break below that floor would leave room for the corrective decline to extend over the coming sessions. On a recovery, the first resistance is the 100-day SMA near 1.4045, ahead of the Bollinger middle band at 1.4140 and the upper band towards 1.4350. A break above the latter would be required to relieve the prevailing bearish pressure.

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