**USD/CAD Outlook: Canadian Dollar Under Pressure Amid Prospects of Bank of Canada Rate Cuts**
*Adapted and expanded from an article by Kenny Fisher, Forex Crunch*
The USD/CAD currency pair has been climbing steadily in recent days, driven largely by weakness in the Canadian dollar (CAD) as markets increasingly price in interest rate cuts from the Bank of Canada (BoC). With the U.S. dollar maintaining relative strength amid a steady Federal Reserve, this divergence in monetary policy is setting up USD/CAD for further potential appreciation.
This article explores the factors behind the recent movements in USD/CAD, implications of a dovish BoC outlook, upcoming economic indicators to watch, and the technical picture guiding traders into the final quarter of 2025.
## BoC to Lead on Rate Cuts?
Speculation is rising that the Bank of Canada could be the first among major central banks to initiate rate cuts in 2025. Despite the BoC keeping its key rate unchanged at 4.75% during the last few meetings, several signals from the central bank have hinted at a more dovish inclination, including a softer tone in recent economic assessments.
### Why Might the BoC Cut Rates?
– **Domestic Economic Slowdown**: Canadian GDP contracted modestly in July 2025, and overall Q2 real GDP came in flat, missing growth expectations. Analysts now predict Canadian economic output may remain stagnant or decline marginally through Q4.
– **Softening Labor Market**: The Canadian jobs market is cooling. August 2025 unemployment ticked up to 6.1%, a notable increase from early-year lows. Job creation, while still positive, has been weaker than forecast.
– **Low Inflation Outlook**: Canada’s Consumer Price Index (CPI) eased to 2.4% year-over-year in August 2025, down sharply from the peak of 4.3% seen earlier in the year. Core inflation, which removes volatile components such as food and energy, has also been moderating steadily.
– **Household Debt Concerns**: With the highest levels of household debt among G7 economies, Canadian consumers are vulnerable to high interest rates. A policy shift to accommodate households is becoming more politically and economically viable.
Governor Tiff Macklem’s recent statement that “rate cuts are a possibility next year, depending on inflation trends” reinforced the market’s view that monetary easing may begin in mid to late 2025.
## Federal Reserve Holds the Line
On the other side of the USD/CAD equation, the U.S. Federal Reserve continues to maintain a data-dependent but largely hawkish outlook as of late September 2025. While inflation in the U.S. has cooled from 2022 and 2023 highs, it has proven to be sticky around 3%, above the Fed’s 2% target.
Key takeaways:
– **Fed Policy Rate**: The U.S. benchmark rate remains at 5.50% as the Fed remains cautious about loosening financial conditions too quickly.
– **Robust Labor Market**: Job growth in the United States remained resilient in Q3 2025, with the unemployment rate holding at 3.7%.
– **Consumer Confidence and Spending**: U.S. consumer confidence remains strong, while retail sales have consistently surprised to the upside throughout the summer of 2025.
This resilience has given the Fed little reason to aggressively consider cutting rates in the immediate future. The result is widening policy divergence between Canada and the U.S., which typically fuels USD strength and depresses the loonie.
## Diverging Yields Support USD/CAD Upside
With the BoC turning dovish and the Fed staying neutral or hawkish, the differential between Canadian and U.S. bond yields is widening. This shift is reflected in capital flows favoring U.S. assets over Canadian ones, which puts downward pressure on the CAD.
– **10-Year Bond Spread**: The spread
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