USD/CAD holds positive ground near 1.4400 ahead of BoC, Fed rate decisions
- USD/CAD posts modest gains to near 1.4400 in Wednesday’s early Asian session.
- The Fed is set to hit the pause button on rate cuts at its January meeting on Wednesday.
- US trade tariff risk and expectation of BoC rate cuts weigh on the CAD.
The USD/CAD pair trades with mild gains around 1.4400 during the early Asian session on Wednesday. The renewed US Dollar (USD) demand provides some support to the pair. Later on Wednesday, all eyes will be on the US Federal Reserve (Fed) and the Bank of Canada (BoC) monetary policy meetings.
The Fed is widely anticipated to leave interest rates unchanged at its current range between 4.25% to 4.5% at its January meeting on Wednesday, but traders will closely monitor the statement for more cues about the outlook for rates.
A hawkish stance of the Fed could lift the USD, while a dovish approach could drag the USD lower against the Canadian Dollar (CAD). Analysts expect the US central bank to take a wait-and-see approach to the Trump administration's policies, which could fuel inflationary.
Mounting economic pressures amid the threat of US trade tariffs could exert some selling pressure on the CAD. "The loonie continues to trade in limbo, awaiting the crystallization of US tariff risks," said Nick Rees, senior FX market analyst at Monex Europe Ltd.
Additionally, the BoC is expected to cut its benchmark interest rate by 25 basis points (bps) to 3.0% on Wednesday. The interest rate differential between Canada and the United States (US) might contribute to the CAD’s downside.
However, the recovery of crude oil prices from multi-week lows might help limit the commodity-linked Loonie’s losses. Canada is the largest oil exporter to the US, and higher crude oil prices tend to have a positive impact on the CAD value.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
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