Canadian Dollar weakness not a factor in rate decisions

The Bank of Canada (BoC) left its policy rate unchanged at 2.25% on Wednesday, as widely anticipated. Governor Tiff Macklem leaned hawkish in the press conference that followed the announcement, as policymakers seem confident about growth and inflation perspectives. Macklem noted that the biggest risks are conflicts in the Middle East and the trade relationship with the US, while repeating decisions will be made one at a time.

BoC Macklem press conference highlights

Economic growth looks to have resumed in Canada.
The economy is projected to grow by 1.8% in both 2027 and 2028.
Longer-term inflation expectations remain well anchored.
Biggest risks are conflicts with the Middle East and the trade relationship with the US.
We will not let higher Oil prices become persistent inflation.
Inflation in Canada is poised to ease gradually, provided global Oil prices decline from elevated levels.
Q2 is looking pretty solid, will be assessing how sustainable the pickup is.
Some businesses like aluminium, are finding new markets.
Higher oil prices are adding to Oil and gas investment.
Exports adjusting to US tariffs and growing.
Signs that the economy is expanding are clearer.
The Canadian dollar weakness has not been a major factor in rate decisions.
If oil prices go higher and remain higher, there may well still be a need for consecutive hikes. This is not our base case.
We’re going to take our decisions one at a time.”

This section below was published at 13:45 GMT to cover the Bank of Canada’s policy announcements and the initial market reaction.

BoC Monetary Policy Report key takeaways

After a year of weakness, Canada’s economy is showing signs of improvement.

Growth is expected to pick up, and inflation will ease gradually from its recent peak.

Uncertainty is still high.

The Canadian economy has been adjusting to US tariffs.

Middle East war-driven inflation’s spillovers to other goods and services remain contained.

Growth in the second quarter is anticipated to be solid at 2.5%.

Inflation is expected to ease to about 2.5% in the second half of 2026 and reach the 2% target by early 2027.”

Market reaction

The Canadian Dollar (CAD) barely reacted to the anticipated outcome, and the USD/CAD pair hovers around 1.4050.

This section below was published as a preview of the Bank of Canada’s (BoC) monetary policy announcements at 09:00 GMT.

• The Bank of Canada is expected to keep its interest rate at 2.25%.
• The Canadian Dollar extends its recovery vs the US Dollar.
• Markets pencil in just over 15 bps of BoC tightening by year-end.

The Bank of Canada (BoC) is widely expected to keep its policy rate unchanged at 2.25% on Wednesday. This would be the sixth consecutive event with the central bank keeping its hand steady.

The BoC left its policy rate unchanged at 2.25% last month, as widely anticipated. The statement and Governor Tiff Macklem’s press conference reinforced a patient approach, as policymakers continue to balance lingering inflation risks against an economy that remains in excess supply.

The central bank expects inflation to hover around 3% in the near term before gradually easing back toward its 2% target. In addition, policymakers also reiterated that they are largely looking through the impact of the Middle East conflict on headline inflation, noting limited evidence that higher energy prices are feeding through more broadly into consumer prices.

While the board stressed it would not allow higher energy costs to become a source of persistent inflation, it gave little indication that a policy response is imminent. Additionally, rate setters also pointed to a likely rebound in growth during Q2, although they cautioned that economic activity remains weak and uncertainty surrounding US trade policy persists.

During his press conference, Governor Macklem emphasised that any future policy move will depend on economic conditions rather than on a predetermined timeline. He noted that core inflation has edged lower, reiterated that economic weakness continues to weigh on prices and argued that little has changed since the previous meeting, with incoming data broadly evolving as expected.

Inflation, however, remains the key watch point after the headline CPI rose by 3.2% in the year to May, above the previous month’s print of 2.8%. In the same direction, the BoC’s core inflation ticked higher to 2.2% from a year earlier. The bank’s preferred measures — CPI-Common, Trimmed and Median — came in mixed. But at 2.7%, 2% and 2.1%, respectively, they still remain above target.

When will the BoC release its monetary policy decision, and how could it affect USD/CAD?

The Bank of Canada will announce its policy decision on Wednesday at 13:45 GMT, followed by a press conference with Governor Tiff Macklem at 14:30 GMT.

Markets anticipate the central bank maintaining its current stance, with a projected tightening of nearly 17 basis points by the end of 2026.

Pablo Piovano, Senior Analyst at FXStreet, points out that further gains in USD/CAD now appear limited by the 1.4250 zone, forcing the pair to recede and revisit the area of multi-week troughs near 1.4050.

“In case the selling pressure gathers traction, the pair’s next relevant support is expected at the provisional 55-day Simple Moving Average (SMA) near 1.3930, while the loss of this region exposes a move toward the critical 200-day SMA around 1.3850, closely followed by the interim 100-day SMA. A deeper and sustained retracement from here should see the next contention at the May floor at 1.3549 (May 1),” Piovano adds.

On the upside, Piovano sees the next hurdle at the YTD peak of 1.4248 (June 24 and 25). The break above the latter could prompt the pair to attempt a move toward the April 2025 ceiling at 1.4414 (April 1).

“Momentum favours extra losses,” he adds, noting that the Relative Strength Index (RSI) is receding further and is revisiting the 44 region, while the Average Directional Index (ADX), just over 43, suggests the underlying trend remains pretty solid.