USD/CAD maintains position above 1.3800 ahead of the BoC policy decision

• USD/CAD remains steady as traders adopt caution ahead of the BoC interest rate decision.
• Traders expect the Bank of Canada to deliver a substantial 50 basis point rate cut in October.
• The US Dollar gains ground as Treasury yields rise amid rising odds of nominal rate cuts by the Fed.

The USD/CAD pair moves sideways, trading around 1.3820 during the Asian session on Wednesday, as traders await the Bank of Canada (BoC) interest rate decision later in the North American session. Market expectations are leaning toward a more substantial 50 basis point rate cut from the BoC.

This potential rate cut would mark the third consecutive rate cut and the first of this magnitude, prompted by decreasing price pressures, along with a significant decline in labor growth and household spending. Consumer inflation fell to 1.6% in September, the lowest level in over three years, reflecting the second consecutive month of price growth within the Bank of Canada’s 2% target.

However, TD Securities stated in its analysis, “We expect the Bank of Canada (BoC) to cut rates by 25 basis points to 4.00% in October, as we do not believe larger cuts are necessary to maintain 2% inflation. Additionally, we do not anticipate that market pricing will heavily influence the Bank’s decision.”

However, the downside of the commodity-linked Canadian Dollar (CAD) could be mitigated due to higher crude Oil prices, as Canada is the largest Oil exporter to the United States (US). West Texas Intermediate (WTI) Oil price extends its gains for the third successive session, trading around $71.40 per barrel at the time of writing.

The US Dollar (USD) strengthened as rising Treasury yields amid rising odds of nominal rate cuts by the Federal Reserve (Fed). The US Dollar Index (DXY), which tracks the USD against six major currencies, is trading near a two-month high at 104.20. Meanwhile, yields on 2-year and 10-year US Treasury bonds are at 4.04% and 4.21%, respectively.

Recent signs of economic resilience and concerns about a potential resurgence of inflation have diminished the chances of a significant rate cut by the Federal Reserve in November. According to the CME FedWatch Tool, there is a 91% probability of a 25-basis-point rate cut, with no expectation of a larger 50-basis-point cut.