**USD/CAD Outlook Ahead of Federal Reserve and Bank of Canada Policy Decisions**
*By Crispus Nyaga, rewritten and expanded*
The USD/CAD currency pair is situated at a critical juncture as traders and investors brace for upcoming interest rate decisions from the Federal Reserve (Fed) and the Bank of Canada (BoC). With increasing market volatility tied to inflation data, central bank guidance, and energy prices, all eyes are on how both central banks plan to steer their monetary policies amid shifting economic fundamentals.
USD/CAD, known as the “Loonie” due to the Canadian dollar’s nickname, has shown resilience but faces conflicting pressures from diverging economic signals in the U.S. and Canada. In this forecast, we examine recent economic data, central bank policy expectations, crude oil’s impact on the Canadian dollar, and technical trends in the USD/CAD market.
## Recent USD/CAD Performance and Market Drivers
The USD/CAD exchange rate currently trades near 1.3700, reflecting a moderately bullish trend for the U.S. dollar relative to the Canadian dollar. Over recent months, the pair has responded to:
– Shifting expectations around interest rates in both the United States and Canada
– Volatility in energy markets, particularly oil prices, which are a major driver of Canada’s export economy
– Mixed economic data from both countries, which has kept traders guessing about the future direction of monetary policy
For context, the Canadian dollar tends to strengthen when oil prices rise due to Canada being a major global crude exporter. Conversely, weaker oil prices usually weigh on the CAD.
## Federal Reserve: Will a Rate Cut Come Soon?
The Federal Reserve has left its benchmark interest rate at a 23-year high, between 5.25% and 5.5%, since mid-2023. Policymakers, led by Chair Jerome Powell, have consistently communicated their desire to see sustained evidence of inflation returning to the 2% target before initiating any rate cuts.
Key economic indicators from the United States supporting the Fed’s cautious approach include:
– Headline inflation decline: Annual U.S. CPI inflation has eased to about 3.0%, but some core inflation measures remain sticky.
– A resilient labor market: The July 2025 jobs report showed an unemployment rate of 4.1% and relatively stable Nonfarm Payrolls growth, suggesting the economy is not in immediate need of monetary easing.
– Strong GDP growth: U.S. GDP grew at an annualized rate close to 2.1% for Q2 2025, supporting the Fed’s stance that the economy can withstand higher borrowing costs.
While financial markets are pricing in one or two rate cuts by the end of the year, the Fed’s own dot plot projections suggest that most central bankers see only one cut coming, likely in Q4. As such, USD strength can persist in the short term unless inflation drops more convincingly.
## Bank of Canada: First to Cut, But What Comes Next?
In contrast, the Bank of Canada cut its overnight interest rate by 25 basis points in June, bringing it down to 4.75%, and has signaled a data-dependent approach going forward. Governor Tiff Macklem emphasized that future rate cuts will depend on how quickly inflation cools relative to wages and consumer spending.
Canada’s inflation rate has come down sharply compared to earlier peaks, and the economy has slowed as higher interest rates weigh on housing and consumer sectors. Key data influencing BoC policy includes:
– CPI inflation in Canada fell to 2.6% in June, closing in on the central bank’s 2% target.
– The economy showed little growth in Q2 2025, with GDP expanding at a mere 0.1% rate.
– Wage growth has remained above 4%, raising concerns about a potential wage-price spiral.
The Bank of Canada has adopted a relatively dovish tone compared to the Fed. Market expectations suggest another cut may come as
Read more on USD/CAD trading.