On Monday, USD/CAD made a comeback, breaking a seven-day downward trend as traders adjusted their positions ahead of important monetary policy announcements from both the Federal Reserve (Fed) and the Bank of Canada (BoC) this week. Currently, the currency pair is trading around 1.4023, after dipping to a low of 1.3969 on Friday, which was its lowest point since mid-September.
The US Dollar Index (DXY), which measures the dollar against a basket of six major currencies, is hovering around 101.87, showing some recovery after last week’s drop to 101.45.
The interest rate decisions from the BoC and the Fed are set for Wednesday, and expectations are diverging. Traders predict a 25-basis-point increase from the Bank of Canada, marking its first rate hike since July 2023. On the other hand, the Fed is likely to maintain the current rates following a 25-basis-point increase in September.
Additionally, the BoC plans to release its quarterly Monetary Policy Report, which will update growth and inflation forecasts. BoC Governor Tiff Macklem has mentioned the impact of consistently high energy prices, which could significantly raise inflation projections. With the market anticipating a BoC rate increase and a pause from the Fed, traders will be keen to analyze the tone of policymakers’ comments for insights into future rate changes.
Commerzbank analysts note that the Canadian Dollar might find some short-term support due to the monetary policy positions of central banks, especially since the BoC appears to be taking a different approach than its counterparts. They believe that both the Fed and the European Central Bank (ECB) are likely to tighten monetary policy less than what the market currently expects. Conversely, they warn that, with the BoC’s recent hawkish stance, there is a risk of heightened inflation expectations, suggesting the BoC could implement multiple rate hikes by the end of next year, which may strengthen the CAD.
Looking beyond central bank announcements, traders are also awaiting important economic data releases this week. On Tuesday, the US will disclose data on Employment Change, Durable Goods Orders, Consumer Confidence, and New Home Sales. Thursday’s focus will shift to the US Personal Consumption Expenditures (PCE) report, third-quarter Gross Domestic Product (GDP), and weekly Initial Jobless Claims. In Canada, GDP data for August is expected to be released on Friday.
