The Canadian Dollar rose for the third consecutive day after the Bank of Canada (BoC) implemented a 25 basis point cut to its policy rate, bringing it to 2.25%. This decision resulted in the USD/CAD falling to 1.3893, the weakest level since September 25. Accompanying the rate cut, the BoC signalled that the easing cycle might soon conclude, with steady inflation forecasts hovering near the 2% target.

Market Reactions

Governor Tiff Macklem noted challenges from US tariffs and reduced global demand, stressing monetary policy’s limited impact on bolstering demand while maintaining low inflation. The BoC adjusted its 2025 inflation projection to 2.0% from 2.3% and anticipates a 1.5% drop in Canada’s GDP level by the end of 2026 compared to earlier estimates. Consequently, traders reduced expectations for more rate cuts, with markets predicting no significant changes until March next year.

Attention now turns to the US Federal Reserve, which is expected to announce a 25 basis point rate cut to 3.75-4.00% at 18:00 GMT. This move follows easing inflation pressures and softer labour conditions. The forthcoming monetary policy statement and Chair Jerome Powell’s press conference will draw considerable interest.

Based on the Bank of Canada’s “hawkish cut” today, we see a clear divergence forming with the Federal Reserve. The BoC has signaled it is likely done easing for now, holding its policy rate at what it deems an appropriate level. This provides a solid foundation for Canadian Dollar strength against the US Dollar, as the Fed is widely expected to continue its own cutting cycle.

This view is supported by recent Canadian data, which shows a resilient economy. September’s CPI report showed inflation holding firm at 2.1%, slightly above the BoC’s target, while the latest jobs report from Statistics Canada revealed a dip in the unemployment rate to 5.4%. These figures give the BoC little reason to promise more rate cuts, making the Loonie an attractive currency.

Economic Outlook

Meanwhile, the US economic picture justifies the Fed’s easing stance. The most recent non-farm payrolls report for September 2025 added a modest 150,000 jobs, below expectations, and the Core PCE inflation gauge has now trended down for four consecutive months to 2.8%. This softening data gives the Fed a green light to cut rates further to support the economy, which should weigh on the US Dollar.

For derivative traders, this suggests the path of least resistance for USD/CAD is lower in the coming weeks. We should consider strategies that benefit from a declining or capped USD/CAD rate, such as buying puts on the pair or selling out-of-the-money call spreads. The fundamental story supports a move towards the 1.3700 level, last seen in early summer 2025.

We have seen this dynamic play out in previous cycles, where policy divergence becomes the main driver for the currency pair. Looking back to the period around 2017, a shift to a more hawkish BoC relative to the Fed led to a significant and sustained rally in the Canadian Dollar. The current setup is reminiscent of that period, suggesting this trend could have momentum into the end of the year.

The immediate focus is on the Federal Reserve’s tone later today. While the 25 basis point cut is priced in, any hint from Chair Powell that the easing cycle may be shorter than anticipated could spark a sharp, short-term rally in USD/CAD. Traders could use short-dated options to hedge against this event risk or to position for increased volatility around the announcement.

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