**USD/CAD Forecast Ahead of the Federal Reserve and Bank of Canada Decisions**
*By Crispus Nyaga, original article published on Invezz.com*
The USD/CAD currency pair is positioned for potential volatility as traders and investors brace for impending monetary policy decisions from the Federal Reserve (Fed) and the Bank of Canada (BoC). Currency markets globally are on edge as these two central banks prepare to provide updates on interest rates amid a backdrop of slowing inflation, modest growth, and diverging labor market trends.
As of now, the USD/CAD rate hovers around the 1.3700 level, recovering slightly from the recent low of around 1.3610. This rebound highlights prevailing uncertainty as markets await clarity on central bank policy direction in the second half of 2025.
This article analyzes the key drivers of the pair leading up to these two central bank announcements, focusing on recent economic data, monetary policy expectations, and the technical outlook for the USD/CAD.
## Overview of USD/CAD Movements
Over the past few weeks, USD/CAD has traded in a range, reflecting a mix of forces pulling the pair in different directions.
– **Strength in the US Dollar**: Driven by sticky inflation in the US and stronger-than-expected economic indicators
– **Resilient Canadian Dollar**: Supported by rebounding oil prices and improving Canadian labor market conditions
The narrowing interest rate differential between the US and Canada has also played a role in the recent fluctuations of the pair.
## Federal Reserve Outlook
The Federal Open Market Committee (FOMC) is scheduled to deliver its monetary policy decision on Wednesday. Market participants expect the Fed to keep interest rates unchanged, but all eyes will be on the tone of the accompanying statement, economic projections, and Chair Jerome Powell’s press conference.
### Key Considerations for the Fed Decision
– **Inflation Trends**:
– US core and headline inflation remains elevated but has shown signs of deceleration.
– The June 2025 Consumer Price Index (CPI) showed a year-on-year increase of 3.2%, compared to 3.3% in May.
– The Fed’s preferred Core PCE inflation increased by 2.9% annually in May, still above the 2% target.
– **Labor Market**:
– The US unemployment rate has remained steady, hovering near 4.2%.
– Non-farm payrolls have shown some signs of slowing, with June added jobs at 180,000 compared to 225,000 in May.
– **FedSpeak and Dot Plot**:
– Recent statements from Fed officials have been mixed.
– Hawkish members suggest inflation has not eased sufficiently to consider rate cuts, while others see room for policy adjustment if economic momentum weakens.
– Investors will scrutinize the updated “dot plot” for signs of possible rate cuts, possibly as early as Q4 2025.
### Market Expectations
As of late July 2025:
– CME FedWatch tool implies a 90% chance the Fed keeps rates steady at 5.50%.
– Futures markets have priced in one rate cut by December 2025, barring any unforeseen macroeconomic shocks.
– Analysts’ consensus suggests Fed tone may be slightly dovish, particularly if economic slowdown concerns intensify.
## Bank of Canada Outlook
The Bank of Canada meets the day following the Fed, and traders are preparing for a possible rate adjustment depending on recent domestic data.
### Key Metrics Behind BoC Strategy
– **Inflation**:
– Canada’s annual CPI stood at 2.5% in June, within the BoC’s target range of 1-3%.
– Core inflation has shown more weakness than in the US, indicating easier price pressures.
– **Labor Market**:
– Canada added 40,000 jobs in June, outperforming expectations.
– The unemployment rate ticked down to
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