USD/CAD holds gains near 1.3850 as BoC cuts interest rates to 3.75%, as expected

The USD/CAD pair remains firm near 1.3850 as the Bank of Canada (BoC) has reduced its key borrowing rates by 50 basis points (bps) to 3.75%. This is the fourth straight interest rate cut by the BoC in a row. However, the size by which the BoC has cut interest rates on Wednesday is larger-than-usual.

The BoC was widely anticipated to deliver an outsize interest rate cut as officials worry that inflationary pressures in Canada could remain lower below 2% amid growing risks of a downturn. Risks to BoC’s dual mandate have not shifted to employment. The Unemployment Rate remains above 6% since February, which should be under 5% theoretically.

The BoC may continue lowering interest rates further if the jobless rate remains elevated. The Canadian swaps market sees roughly a 25% chance of another 50-basis point rate cut in December. Meanwhile, the central bank has left its growth rate for this year unchanged at 1.2%. After the interest rate decision, BoC Governor Tiff Macklem said that their focus is to maintain stable, low inflation.

Meanwhile, higher US bond yields have strengthened the US Dollar (USD). The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, recaptures August’s high of 104.45. US Treasury yields gain amid growing speculation over United States (US) presidential elections and expectations of a more gradual Federal Reserve’s (Fed) policy-easing cycle.

In today’s session, investors will pay close attention to the Fed’s Beige Book, which summarizes economic conditions across 12 Fed districts and will be published at 18:00 GMT.