USD/CAD falls to one-month low as BoC delivers "hawkish cut"

• The Canadian Dollar extends gains for the third straight day after BoC delivers a "hawkish cut."
• BoC lowers policy rate by 25 bps to 2.25%, as expected, but signals easing cycle may be near its end.
• Traders await the Federal Reserve's interest rate decision at 18:00 GMT, where a 25 bps rate cut is widely expected.

The Canadian Dollar (CAD) strengthened against the US Dollar (USD) on Wednesday, with USD/CAD falling to around 1.3893, its weakest level since September 25. The Loonie extended its winning streak for the third straight day after the Bank of Canada (BoC) cut its benchmark rate by 25 basis points (bps) to 2.25%, as expected, but accompanied the move with surprisingly firm forward guidance.

The central bank described the current policy rate as "about the right level if inflation and activity evolve as projected," suggesting the latest cut could mark the end of the easing cycle. That message, alongside steady inflation forecasts near the 2% target, sparked a hawkish market reaction, lifting the CAD despite the rate reduction.

Governor Tiff Macklem acknowledged the economy faces headwinds from US tariffs and slower global demand, but cautioned that monetary policy has "limited ability to boost demand while maintaining low inflation." The BoC trimmed its 2025 inflation forecast to 2.0% from 2.3% in January, while maintaining projections of 2.1% in both 2026 and 2027. It also expects Canada's GDP level to be about 1.5% lower by end-2026 compared with its January projections

The combination of a "dovish headline, hawkish message" prompted traders to scale back expectations for further rate cuts. According to Reuters, money markets are not pricing in any probability of rate cuts until March next year.

On the US side, attention now shifts to the Federal Reserve's (Fed) interest rate decision due at 18:00 GMT. Markets broadly expect a 25 bps cut to 3.75-4.00%, marking a second consecutive reduction as policymakers respond to easing inflation pressure and softer labor conditions.

Although the rate cut is fully expected, the focus will be on the accompanying monetary policy statement and Chair Jerome Powell's tone during the press conference.