USD/CAD weakens as BoC holds rates, US data disappoints

• USD/CAD trades below 1.3700 after the Bank of Canada leaves rates unchanged at 2.75%.
• The Canadian Dollar is supported by the BoC's cautious stance and strong Q1 growth.
• The US Dollar weakens as ADP jobs data and ISM Services PMI fall short of expectations

The Canadian Dollar (CAD) extends its advance against the US Dollar (USD) on Wednesday after the Bank of Canada (BoC) held interest rates steady, aligning with market expectations. Meanwhile, the US Dollar weakens across the board following a sharp miss in the ADP Employment Change and a softer ISM Services PMI. The combination of domestic policy stability and disappointing US data is helping USD/CAD strengthen below the key 1.3700 psychological level, keeping the pair under bearish pressure.

At the time of writing, USD/CAD is trading lower at around 1.3668 during the American session, marking its lowest level since October 2024. This follows a modest gain on Tuesday, but bullish momentum faded as sellers stepped back in amid broad-based USD weakness.

The US Dollar Index (DXY) is edging lower from its intraday high of 99.39, paring most of the previous day's gains, trading around 98.70. The latest ADP report showed that US private sector employment rose by just 37,000 in May, well below the expected 115,000, signaling a sharp slowdown in hiring.  Meanwhile, the ISM Services PMI fell to 49.9 in May, missing the 52.0 forecast and down from April's 51.6.

The Bank of Canada left its policy rate unchanged at 2.75% on Wednesday, aligning with market expectations, citing persistent inflationary pressures and ongoing uncertainty stemming from US trade policies. Governor Tiff Macklem flagged the ongoing trade conflict with the United States as the most significant headwind for the Canadian economy, calling US policy moves "highly unpredictable." While the central bank opted to stay on hold for now, Macklem warned that further rate cuts could be necessary if economic conditions deteriorate under the weight of escalating tariffs.

In its monetary policy statement, the BoC highlighted that first-quarter GDP growth exceeded expectations, driven by a surge in exports and inventory accumulation ahead of impending US tariffs. However, the central bank anticipates a significant slowdown in the second quarter, with domestic demand remaining subdued and trade-sensitive sectors experiencing labor market weaknesses. Inflation dynamics also influenced the BoC's decision. While headline inflation eased to 1.7% in April, core inflation measures rose to 3.15%, the fastest pace in nearly a year, driven by supply chain disruptions resulting from US tariff policy.

Looking ahead, the BoC maintains a cautious stance, signaling that rate cuts could be considered if economic conditions weaken further. The central bank is closely watching the impact of trade tensions and slowing demand on growth and inflation.