Canadian Dollar barely moves on Fed rate hold following BoC hike

USD/CAD swings around 1.4050 on the BoC hike and barely moves on the Fed hold.
The BoC's first rate rise since July 2023 takes it to 2.50% from 2.25%.
Canada's August GDP is out Friday, against Statistics Canada's 0.2% estimate.

The Bank of Canada (BoC) raised its rate to 2.50% on Wednesday and the Fed held at 3.75%-4.00%, so the Fed's lead shrank by a quarter-point in one session. USD/CAD went through 1.4050 in both directions in the five-minute bar on the BoC release, and its dip on the Fed's statement stopped above the low it set before either decision. It's trading below 1.4050.

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It's the BoC's first increase since July 2023, made to stop high energy prices spreading into other prices, and it leaves the Fed's lead at 1.25-1.50 points. The Monetary Policy Report (MPR) raised the 2027 inflation forecast to 3.1% from 2.0% and doesn't have inflation back near 2% until mid-2028. BoC Senior Deputy Governor Rogers said policymakers broadly agreed that inflation risks had risen.

BoC Governor Macklem said the rate is still low enough not to restrain growth, and the same report raised the 2026 growth forecast to 1.0% from 0.7%. The BoC said it may need to raise again but will proceed carefully. TD Economics expects one more, to 2.75%, which would cut the Fed's current lead to 1.00-1.25 points.

On the calendar

Statistics Canada publishes August Gross Domestic Product (GDP) at 12:30 GMT on Friday, against its own advance estimate of a 0.2% rise. US third-quarter growth and the Personal Consumption Expenditures Price Index (PCE) for September land a day earlier, also at 12:30 GMT. Both feed the next decisions, which the Fed and the BoC both announce on December 9.

Fed Chair Warsh faces reporters from 18:30 GMT on Wednesday, after the BoC has already moved. He told the International Monetary Fund (IMF) meetings on October 16 that other central banks share his worry about high inflation. What he says about December bears on whether the Fed's lead over the BoC widens again on December 9.

On the charts

The pair has traded between just above 1.4000 and short of 1.4100 on Wednesday, with the high set before the slide that preceded the BoC release. Since that release it has held the lower half of the range, and intraday momentum climbed toward overbought into the Fed decision.

USD/CAD 5-minute chart

Interest rates FAQs

What are interest rates?

Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.

How do interest rates impact currencies?

Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.

How do interest rates influence the price of Gold?

Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.

What is the Fed Funds rate?

The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.

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