Canadian Dollar extends losses as BoC holds rates amid inflation concerns and trade risks

• The Canadian Dollar weakens for the fifth straight day, pressured by a strong US Dollar.
• The Bank of Canada holds its key interest rate at 2.75%, as expected, citing persistent core inflation and trade uncertainty.
• Reuters poll: 18 of 28 economists forecast a 25 bps rate cut in September; 17 expect at least two cuts this year.

The Canadian Dollar (CAD) extends losses for the fifth consecutive session against the US Dollar (USD) on Wednesday, as the Greenback continues its broad-based rally following stronger-than-expected US economic data. Adding to the bearish pressure on the Loonie, the Bank of Canada (BoC) left its benchmark interest rate unchanged at 2.75%, as widely anticipated, citing elevated core inflation and heightened global uncertainty.

The combination of robust US data and a cautious BoC stance is fueling upward momentum in USD/CAD. At the time of writing, the USD/CAD pair is hovering around 1.3810, its highest level since May 30, up over 0.70% so far this week.

The BoC's decision to hold its policy rate at 2.75% signals a cautious stance as officials balance persistent core inflation with signs of slowing domestic growth and rising trade uncertainty. While headline inflation has moderated, core inflation remains stubbornly above 3%, leaving policymakers hesitant to ease too soon. In its accompanying statement, the BoC acknowledged signs of moderation in economic activity but emphasized that inflation risks remain tilted to the upside, particularly amid ongoing wage growth and resilient consumer spending.

The central bank also flagged ongoing uncertainty surrounding US-Canada trade relations as a growing downside risk. "While some elements of US trade policy have started to become more concrete in recent weeks, trade negotiations remain fluid, threats of new sectoral tariffs continue, and US trade actions remain unpredictable," the BoC noted in its policy statement.

Markets had widely anticipated the BoC to keep rates unchanged, with money markets pricing in only a 7% probability of a cut prior to the decision. Still, the bank didn't rule out the possibility of cutting rates later this year, keeping those expectations alive. According to a Reuters poll, nearly two-thirds of economists (18 out of 28) expect the BoC to begin cutting rates in September, forecasting a 25 basis point reduction to 2.50%. While there is no firm consensus on where rates will land by year-end, over 60% of respondents (17 economists) projected at least two more rate cuts in 2025, with five predicting as many as three reductions before the close of the year.

Attention now shifts to Governor Tiff Macklem's press conference and the release of the Monetary Policy Report (MPR), which will provide fresh forecasts on growth and inflation and may shed light on the BoC's next moves. Meanwhile, focus also turns to the Federal Reserve's monetary policy decision due later on Wednesday, where the Fed is widely expected to keep interest rates unchanged. However, after a string of upbeat US data releases, traders will be closely watching the Fed's forward guidance for any hawkish signals that could reinforce US Dollar strength and further pressure the Canadian Dollar.