The USD/CAD exchange rate remained in a tight range last week as market participants waited for the upcoming Bank of Canada (BoC) and Federal Reserve interest rate decisions. It was trading at 1.3800, up by 2.30% above its lowest level this year.
Federal Reserve interest rate decision
The main catalyst for the USD/CAD exchange rate will be the upcoming Federal Reserve interest rate decision, which is expected to mark the beginning of interest rate cuts.
Economists expect the bank to cut interest rates by 0.25% in this meeting, following the recent economic numbers. One report showed that the labor market is softening, with the unemployment rate rising to 4.3% and the economy adding just 22,000 jobs.
Another report released last week showed that the number of people on payrolls was much lower than expected. The annual revision was the worst in years, a situation that may get worse over time.
The main challenge for cutting interest rates is that inflation remains substantially higher than the bank’s target. Data released last week showed that the headline Consumer Price Index (CPI) rose from 2.7% in July to 2.9% in August, while the core CPI remained at 3.1%. The Fed targets inflation at 2.0%.
Most analysts now expect several interest rate cuts this year as the bank prioritizes the labor market instead of inflation. In a report, analysts from ING Bank said that:
“Evidence of cooling consumer demand and a weakening jobs market is becoming more obvious. Inflation remains above target and tariffs are likely to keep it elevated in the near term, but the balance of risks are tilted towards the need for more support for the economy.”
Bank of Canada interest rate decision ahead
The other important catalyst for the USD/CAD pair will be the upcoming Bank of Canada interest rate decision on Wednesday.
This decision comes as analysts expect that the Canadian economy will slow down this year because of Donald Trump’s tariffs on Canadian goods.
He added a 25% tariff on goods that don’t meet the USMCA rules of origin, a 10% on Canadian energy, and 25% on non-compliant auto parts
Analysts and Bank of Canada economists expect that the economy will grow by between 1% and 1.2% this year, well below the 1.6% experienced last year
Most economists now expect that the BoC will restart its interest rate cuts now that inflation has moved below the 2% target of the bank. The most recent data showed that the headline CPI dropped to 1.7% in July from 1.9% in June. Another report showed that the unemployment rate rose in August. In a note, ING analysts said:
“The BoC is set to resume cutting interest rates in the wake of a large GDP contraction in the second quarter and rising unemployment. Tariffs will continue to weigh on the economy, and with inflation broadly in line with target, we look for a 25bp cut on Wednesday, with a further 25bp cut in the fourth quarter.”
The daily timeframe chart shows that the USD/CAD exchange rate has rebounded from the year-to-date low of 1.3537 to 1.3845.
It has formed an ascending channel and moved above the 50-day and 100-day Exponential Moving Averages (EMA).
The Relative Strength Index (RSI) and other oscillators have continued rising. Therefore, the pair will likely continue rising as bulls target the important psychological level at 1.400.
In the longer term, however, the pair will likely resume the downward trend and retest the support at 1.3700.
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