USD/CAD forecast: BoC and Fed decisions loom

The USD/CAD forecast is subject to heightened volatility today as both North American central banks will decide on their respective monetary policies. Following the release of some stronger US data in recent days, the US dollar has rebounded against most major currencies, most notably the yen, although it has struggled against the ComDolls owing to an overall positive risk appetite. With the CAD looking strong, the USD/CAD is one to watch for potential downside traction once the dust of rate decisions settles.

 

Bank of Canada to push back against rate hike bets

 

The Bank of Canada will shortly decide on interest rates, and literally no one is expecting any changes, meaning the policy rate is set to remain at 2.25%. This meeting takes place amid a broader hawkish shift in global rate expectations, which is partly why commodity dollars have bounced back with markets pricing in around 30 basis points of rate hikes from the BOC by the start of Q4 next year. But given that the BOC has only recently ended its rate-cutting cycle, it feels premature for the central bank to signal rate hikes for 2026 at this meeting. That could expose the downside risks for the USD/CAD forecast today, and the currency pair could climb even higher should the Fed turn out to be more hawkish later on in the day than expected. However, I would then expect to see the USD/CAD resume lower as the US dollar recovery loses steam.

 

FOMC cut a done deal

 

Though there is a small 10% chance of a no cut, as implied by rates markets, the Fed wouldn’t want to disappoint the market today and it will most definitely provide that 25 bps cut, which would bring the target range down to 3.50–3.75%. But the rate decision was never going to be the main focus today, anyway. Much of the attention will be on the dot plots, the number of dissenters opposing the cut, and Chair Powell’s press conference.

 

If the dot plots show only one or two cuts for 2026, this will disappoint expectations given market’s pricing of 70-80 basis points (that equates to more than three 25bps cuts). There is also a risk that dissenters opposing the cut will be higher compared with just one in October. Watch out for any surprise revisions to growth and unemployment, too.

 

Much of the focus will be on the outgoing Chairman Jerome Powell’s press conference. Last time it was during this event that triggered a sharp rally in the dollar. If he suggests that the three consecutive cuts have pushed the policy rate closer to neutral, then watch out for a quick pop in the greenback.

 

Admittedly, though, the market must be expecting that sort of a language from the Fed anyway given that the markets have been reassessing global central bank policy through a more hawkish lens in the last couple weeks anyway. The fact that the markets are still pricing in a few rate cuts for 2026 suggests that much of this has to do with expectations that front-runner Kevin Hassett, a dove, will be steering the Fed’s policy in a few months’ time. Consequently, Powell’s comments of future policy will have diminishing impact on the dollar. Any dollar rally on the back of his comments should therefore be short-lived.

 

Technical USD/CAD forecast and key levels to watch

 

From a technical point of view, the USD/CAD forecast leans bearish. The currency pair topped out in February this year after a false breakout attempt above the prior highs formed around the 1.4670–1.4690 area in 2016 and 2020. Since that fake-out, the USD/CAD has been printing lower lows and lower highs, until bottoming at 1.3540 in June. From that low, rates managed to climb all the way to 1.4140 area by November, before the selling resumed.

 

 

Last week saw rates break decisively below the 200-day moving average and a bullish trend line around the 1.3900–1.3955 area. This zone, once key support, is now the most important resistance region to watch. For as long as this area holds, the path of least resistance remains to the downside for the USD/CAD.

 

The most immediate target is the liquidity resting below the recent low near the 1.3800 handle. Below that, there isn’t much in the way of obvious support until around 1.3700. Under 1.3700, the next levels come in at 1.3600, followed by the June low at 1.3540 as the next major downside target.

 

 

 

 

 

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R