USD/CAD trades sideways as BoC policy takes centre stage

USD/CAD trades sideways as BoC policy takes centre stage

• USD/CAD consolidates as investors await BoCs policy decision, which will be announced on Wednesday.
• The BoC is expected to cut interest rates by 50 bps to 3.75%.
• The uncertainty over US presidential elections keeps market sentiment jittery.

The USD/CAD pair consolidates in a tight range above the round-level support of 1.3800 in Tuesday‘s European session. The Loonie pair trades back and forth, with investors focusing on the Bank of Canada’s (BoC) interest rate decision, which will be announced on Wednesday.

The BoC is expected to reduce its key borrowing rates by 50 basis points (bps) to 3.75%. This would be the fourth straight interest rate cut by BoC in a row. However, the rate-cut size will be larger than usual due to consistently rising jobless rate and slowing inflationary pressures. In September, the Canadian Unemployment Rate decelerated to 6.5% from 6.6% in August but is still higher than 5%, which is often considered a full employment level.

The Canadian economy needs fresh stimulus to boost overall spending and employment levels, which makes more rate cuts as appropriate. Meanwhile, a tight competition between former US President Donald Trump and current Vice President Kamala Harris for presidential elections, which are two weeks away has also kept the Canadian Dollar (CAD) on tenterhooks. The victory of Trump would result in higher import tariffs, which would undermine the currencies of the United Statess (US) trading partners, such as Canada.

Meanwhile, a firm US Dollar (USD) has also weighed on the Loonie pair. The US Dollars outlook is upbeat as investors expect a gradual rate-cut cycle from the Federal Reserve (Fed) in the remainder of the year. According to the CME FedWatch tool, the Fed is expected to cut interest rates by 25 basis points (bps) in November and December.

On the economic front, investors will pay close attention to the flash S&P Global PMI data for October, which will be published on Thursday.

Economic Indicator

BoC Interest Rate Decision

The Bank of Canada (BoC) announces its interest rate decision at the end of its eight scheduled meetings per year. If the BoC believes inflation will be above target (hawkish), it will raise interest rates in order to bring it down. This is bullish for the CAD since higher interest rates attract greater inflows of foreign capital. Likewise, if the BoC sees inflation falling below target (dovish) it will lower interest rates in order to give the Canadian economy a boost in the hope inflation will rise back up. This is bearish for CAD since it detracts from foreign capital flowing into the country.