Insights 
VT 
USD/CAD remains under pressure as traders anticipate a 25-basis-point rate cut by the US Federal Reserve on Wednesday. This decision has contributed to the USD/CAD pair trading around 1.3990, marking its second consecutive day of losses. The Fed is expected to lower the benchmark rate to 3.75-4.00%, with a nearly 97% chance of a cut in October and 95% likelihood in December.
Impact on the Canadian Dollar
The Canadian Dollar may struggle further due to potential increases in Oil production by OPEC+ in December, affecting Oil prices. The CAD could also face pressure from a planned 25-basis-point rate cut by the Bank of Canada on October 29. Oil prices, such as West Texas Intermediate, continue to decline, with the commodity trading at approximately $61.10 per barrel.
The Canadian Dollar is influenced by the Bank of Canada’s interest rates, Oil prices, and the US economy’s health. Canada’s key economic indicators, inflation, and public sentiment are essential factors affecting the CAD. Strong economic data supports the CAD, while weak data could lead to its depreciation. The recent announcement by the US President to increase tariffs on Canadian goods could also impact the CAD negatively.
The Bank of Canada also influences the economy through quantitative easing and tightening, affecting credit conditions. Interest rate adjustments are used to control inflation, aiming to maintain levels between 1-3%. Higher Oil prices and stronger economic data can lead to a stronger Canadian Dollar.
As we look at the market on October 28, 2025, we see USD/CAD trading around 1.3710, a different landscape from past scenarios where it struggled below 1.4000. Both the Federal Reserve and the Bank of Canada (BoC) are signaling that their aggressive rate-hiking cycles are over, but the key question for us is who will cut rates first. Current market pricing suggests a 65% chance the BoC will cut rates in the first quarter of 2026, ahead of the Fed.
The Path Forward
For the US dollar, we are seeing signs of economic softening that warrant attention. The most recent Initial Jobless Claims figures ticked up to 230,000, and the latest core inflation reading has eased to 3.1%, moving closer to the Fed’s target. This data strengthens the case for the Fed to remain on hold, but it also increases the sensitivity to any further weakness, which could rapidly bring forward rate cut expectations.
The Canadian dollar, meanwhile, is facing its own headwinds despite relatively firm oil prices, with West Texas Intermediate holding around $79 per barrel. Canada’s latest GDP report showed a slight contraction of 0.1% last quarter, highlighting the economy’s vulnerability to high interest rates. This divergence, where Canada’s economy is weakening faster than the U.S., suggests the path of least resistance for USD/CAD is upwards.
Given this context, traders should be cautious about expecting significant Canadian dollar strength. We recall periods, such as in late 2019, when both central banks were leaning dovish, leading to choppy, range-bound trading. A viable strategy now could involve buying USD/CAD on dips, targeting a move back towards the 1.3850 area over the next few weeks as the market prices in a more dovish BoC.
Unlike the past era of sudden tariff announcements, the current trade environment under the USMCA is more stable, removing a source of volatility. Therefore, our focus should be squarely on the upcoming employment and inflation data from both countries. Any surprisingly weak Canadian data or resilient U.S. data will likely accelerate the upward trend in the currency pair.
