Insights 
VT 
The Bank of Canada (BoC) cut its key interest rate by 25 basis points to 2.25%, potentially ending the easing cycle. BoC Governor Tiff Macklem highlighted the economic damage caused by US tariffs but noted that inflation remains near 2%. Consequently, the EUR/CAD pair declined, reaching around 1.6180, with the Canadian Dollar (CAD) strengthening following the monetary decision.
Despite the rate cut, the BoC’s stance was seen as hawkish, with the policy rate deemed fitting if economic conditions and inflation evolve as predicted. The BoC projects inflation to remain stable at around 2% but revised GDP forecasts lower for 2025 and 2026. Macklem recognized ongoing economic challenges due to US trade policies and global demand slowdowns, reflecting in weaker GDP projections and softened labour market conditions.
GDP Projections And Inflation
The BoC expects GDP to fall 1.5% below previous forecasts by the end of 2026. Analysts suggest it would take a major shock for further rate cuts, as the BoC sees the current policy rate as adequate. While further data will inform future decisions, the consensus is that the easing cycle has ended for now. Meanwhile, the CAD’s strength post-BoC meeting contrasts with the European Central Bank’s expected interest rate stability.
Based on the Bank of Canada’s decision today, we see a clear signal that the rate-cutting cycle is likely over for now. This shift to a more hawkish stance, despite the 25 basis point cut to 2.25%, makes the Canadian dollar fundamentally more attractive. The market’s immediate reaction, pushing EUR/CAD down to 1.6180, confirms this view and suggests further strength for the Loonie in the near term.
The key takeaway is the growing policy divergence between the Bank of Canada and the European Central Bank. With the BoC pausing at 2.25% and the ECB expected to hold its rate at 2.00%, the interest rate differential now favors the CAD. We saw a similar dynamic play out in 2017 when the BoC began a hiking cycle well ahead of other central banks, leading to a sustained period of CAD strength.
Strategies And Market Outlook
For the coming weeks, we should consider strategies that benefit from a falling EUR/CAD. Buying put options expiring in December 2025 or January 2026 with strike prices below 1.6100 would be a direct way to position for this move. With Canada’s latest inflation data from September holding firm at 2.1%, the BoC has a solid reason to hold rates steady, reinforcing this trade idea.
The BoC’s clear communication should also help reduce implied volatility in CAD currency pairs. This environment is favorable for selling options, so we might look at selling out-of-the-money call spreads on EUR/CAD. This strategy profits if the pair trades sideways or moves lower, and it also benefits from the expected decline in volatility.
We must remain cautious on the USD/CAD pair, as the article notes that US tariffs continue to pose a risk to the Canadian economy. Recent data showing US third-quarter GDP grew at a solid 2.4% annual rate suggests the Federal Reserve is in no rush to cut its own policy rate, which could limit the Loonie’s upside against the US dollar. Therefore, being short EUR/CAD appears to be a higher-conviction trade than being long CAD against the USD.
