Canadian Dollar gains after BoC rate hike as attention turns to US PCE data

• Early Asian trading on Thursday sees USD/CAD edge lower towards 1.3975.
• For the first time in more than three years, the BoC increased interest rates.
• October brought no change to the Fed’s benchmark interest rate.

A rate increase from the Bank of Canada (BoC) lifts the Canadian Dollar (CAD) against the US Dollar (USD), with USD/CAD slipping towards 1.3975 in early Asian trading on Thursday. Attention now turns to Thursday’s preliminary US Gross Domestic Product (GDP) figures for the third quarter (Q3), alongside September’s Personal Consumption Expenditures (PCE) inflation release.

At Wednesday’s October policy meeting, the BoC increased its benchmark overnight interest rate by 25 basis points (bps) to 2.50%. Further rises might be needed, Governor Tiff Macklem said, but uncertainty over the economic outlook would require policymakers to tread carefully.

The BoC set out its revised outlook in its statement: "Given the ongoing resilience of the global economy, the Bank has revised up global GDP growth slightly to 3.1% in 2026, while growth in 2027 and 2028 remains unchanged from the July projection at 3.2%."

Renewed worries about disruption to Middle Eastern energy supplies lift oil prices on Thursday. According to Reuters, Yemen’s Iran-aligned Houthis attacked Aden airport on Wednesday, having warned people to leave the facility. The group had said on Tuesday that it launched a ballistic missile towards the Ras Tanura oil refinery in eastern Saudi Arabia, the kingdom’s largest refinery.

As Canada is a major oil exporter, stronger crude prices generally provide support for the Loonie.

Wednesday’s Federal Reserve (Fed) decision left the benchmark federal funds rate within a range of 3.75% to 4.00%, in line with widespread expectations.

While upgrading its assessment of the economy, the US central bank acknowledged that inflation 'remains elevated,' and indicated that further rate increases may follow, depending on how inflation develops.

BoC Rate Rise Expectations Strengthen as Banks Question Lasting CAD Upside

Underlying inflation remains close to the Bank of Canada’s projections, according to BBH analysts, who observe that “the average of CPI trim and median was 1.85% y/y in September, tracking just below the BoC’s 2.0% Q3 projection.” On the outlook for further tightening, they note that “the pick-up in firm’s one- and two-year inflation expectations could lift the core CPI outlook, reinforcing the case for further hikes.” Higher BoC projections are also expected by BBH: “the BoC will likely raise its inflation and real GDP forecast, which can underpin CAD,” the analysts argue, pointing out that “September headline CPI printed at 3.1% y/y, exceeding the bank’s 2.5% Q3 projection, while Q2 real GDP grew 3.3% annualized vs. the bank’s 2.5% projection.”

Dollar Bulls Retain Support as Warsh Reaffirms Firm 2% Inflation Target

A 7/10 FXS Speechtracker score places Warsh’s firmly hawkish press conference tone in line with the established baseline, suggesting continuity rather than a change of regime. His emphasis that “ensuring price stability is not about a fixed date on a calendar”, together with references to “new monetary medicine” and September’s withdrawal of accommodation, conveys a policy approach that remains data-dependent and firmly committed to bringing inflation down. That message holds even as inflation expectations are described as “going the right way.” With repeated pledges of “no ifs and or buts, we will deliver price stability” and a firm 2% PCE target, the overall signal remains one of restrictive policy. Acknowledgement that interest rates are having an impact on technology and CAPEX adds to that picture, supporting the Dollar and leaving risk assets sensitive to signs of further tightening.

A rise of +14.39 points took the FXS Fed Sentiment Index to 141.89, moving it decisively further into hawkish territory and aligning with the consistent 7/10 reading from the FXS Speechtracker. The index stands well above the neutral 100 threshold. Against that backdrop, markets are likely to view Warsh’s focus on effective “monetary medicine” and firm commitment to the 2% PCE target as confirmation that rates will stay higher for longer. Such conditions typically support the Dollar but weigh on high-beta FX and rate-sensitive assets.

Technical Analysis: USD/CAD Stays Under Pressure Below the 100-Day SMA

Trading below both the 100-day simple moving average (SMA) and the middle Bollinger band leaves USD/CAD with a bearish near-term outlook on the daily chart. As the pair pulls back from the upper half of its recent Bollinger envelope, the Relative Strength Index (14), at 38.5, points to subdued momentum rather than clearly oversold conditions. Sellers therefore appear to retain control, although downward momentum is easing.

The 100-day SMA near 1.4045 provides the first resistance level, ahead of the middle Bollinger band at 1.4140 and the upper band towards 1.4350. A break above that upper band would be required to relieve the prevailing bearish pressure. Initial significant support lies at the lower Bollinger band around 1.3930; a decisive breach of that floor would leave scope for the corrective decline to extend over the coming sessions.

(The technical analysis of this story was written with the help of an AI tool. Know more.)