BoC poised to cut rates, Canadian Dollar edges lower

The Canadian dollar is steady on Wednesday. In the European session, USD/CAD is trading at 1.44236, up 0.23% on the day. It should be a busy day for the Canadian dollar, with the Bank of Canada and the Federal Reserve announcing rate decisions.

Bank of Canada expected to trim rates while Fed will hold

I can’t remember the last time that the Federal Reserve and the Bank of Canada held their rate meetings on the same day, which should make for a lively North American session. The Bank of Canada is expected to cut rates while the Fed is virtually certain to maintain rates.

The Bank of Canada has been aggressive in its easing cycle, chopping borrowing costs by 175 basis points since June 2024, including two consecutive oversize cuts of 50 basis points in October and December. This time, the BoC is expected to ease up and deliver a modest rate cut of 25 basis points, which would lower the cash rate to 3%, the lowest in over two years. It’s a very different world than a month ago, as US President Trump has clouded the global economic outlook with his threat of tariffs.

Trump’s tariffs could be devastating for the Canadian economy, which is heavily intertwined with its southern neighbor. The US is Canada’s biggest trade partner by far, with some 76% of Canada’s exports going to the US. Understandably, the prospect of a trade war with the US is a huge concern and Bank of Canada Governor Macklem called the trade threat a “major new uncertainty” in December, even before Trump took office.

Another headache for the BoC is the swooning loonie, which is down over 6% against the US dollar since September 2024. If the BoC cuts today and the Fed holds, as expected, there will be further downward pressure on the Canadian dollar as the US/Canada rate differential will widen.

The Federal Reserve is expected to maintain rates at the 4.25%-4.5% range today, after three straight reductions in 2024. The Fed has signaled that it plans to cut rates gradually, but the strong US economy could mean that the Fed will cut only once or twice in 2025.

USD/CAD technical

• USD/CAD tested support at 1.4394 earlier. Next, there is support at 1.4341.

• There is resistance at 1.4428 and 1.4455.