CAD: BoC to cut by 25 bps
For today’s double header, the market’s interpretation of the tone and forward guidance of the Federal Reserve and Bank of Canada decisions will be the primary drivers in North American FX today. Ahead of both meetings, the USD dollar has weakened to its lowest level since the beginning of July.
For today’s meeting, the BoC’s predicament has been largely resolved by inflation data yesterday. While the need to support a weakening economy remains a key driver for a rate cut, the most significant counterargument, the imperative to contain persistent inflationary pressures, has been defused, for now. Yesterday’s inflation data provides clearer evidence that price pressures are somewhat easing, giving the BoC the room it needs to act.
- Case for a rate cut (strengthened): The evidence for a rate cut remains robust. GDP has contracted, and the labor market has deteriorated, with over 100,000 jobs lost in July and August and the unemployment rate climbing to 7.1%. External risks, including a slowing U.S. economy further compound domestic fragility. The Canadian economy is still navigating the aftermath of trade disruptions, and a rate cut could provide a much-needed boost, particularly given the lagged nature of policy transmission.
- Case for a hold (weakened): The primary argument against a rate cut has been significantly weakened. While the headline inflation rate rose to 1.9%, this was driven by volatile energy prices, not broad-based pressures. More critically, the core CPI slowed to 2.4%, suggesting that underlying inflationary trends are moderating. This gives the BoC a clear signal that it can ease policy without risking an inflationary surge. While final domestic demand and consumption showed resilience in Q2, the overall economic picture, now including the more favorable inflation data, has tipped the scales firmly toward a rate cut. But what about the outlook beyond today’s decision? The fiscal landscape remains uncertain, and the full effects of previous rate cuts have yet to materialize, both of which continue to complicate the picture. As a result, the Bank of Canada is likely to reiterate that decisions at its remaining two meetings this year will hinge on incoming data.
The real uncertainty now lies in the tone and forward guidance it provides.
This is where the Fed comes in, and the interplay between the two central banks.
Outlook for the CAD
Scenario A: BoC “Dovish” Cut vs. Fed “Hawkish” Cut
- BoC action: The BoC cuts its policy rate, and the statement and/or press conference are perceived as “dovish,” even though a clear path for further easing isn’t confirmed. The communication emphasizes the need to support the Canadian economy and suggests this is the continuation of the broader easing cycle.
- Fed action: The Fed also cuts its policy rate, as expected. However, the tone is interpreted as a “hawkish cut,” which would be a surprise to the market. The Fed downplays the need for further cuts and emphasizes that it is not committing to the continuation of the full-blown easing cycle.
- CAD outlook: This is a bearish scenario for the USD/CAD. The Fed’s hawkish cut makes the USD strengthen as it suggests the U.S. is not on a sustained path of monetary easing. The USD/CAD pair would likely move upward, potentially rising toward or above 1.386.
Scenario B: BoC “Hawkish” Cut vs. Fed “Dovish” Cut
- BoC action: The BoC cuts its policy rate, but the statement is surprisingly “hawkish.” The BoC would likely emphasize the recent CPI volatility and the underlying resilience of the economy, suggesting that this cut is a one-off measure and that the bank is prepared to pause. While this outcome is less likely after the August inflation report, it remains a possibility if the BoC wants to maintain a high degree of flexibility.
- Fed action: The Fed cuts its policy rate, and the statement is “dovish.” The Fed would stress the need to support the U.S. economy and signal a clear commitment to a full easing cycle.
- CAD outlook: This would be very bullish for the CAD. This would soften the USD and the USD/CAD pair would likely move sharply downward, potentially breaking below 1.37.
The two scenarios where both central banks deliver “dovish” cuts or “hawkish” cuts are unlikely to trigger a definitive breakout for the USD/CAD. Instead, they will most likely keep the pair confined to its recent summer trading range. The real question is whether this Wednesday’s confluence of central bank decisions will provide the necessary catalyst for a significant directional move beyond that range. The answer lies not in the rate cuts, which are largely priced in, but in the narrative and the forward guidance.
EUR: Euro extends to 4-year high
The euro climbed to its strongest level in four years against the US dollar as traders prepared for an interest-rate cut from the Fed this week that will cement its diverging trajectory from the European Central Bank (ECB). The common currency is up over 14% in 2025, and although the path this year isn’t a repetition of 2017, the resemblance is unmistakable – suggesting that structural forces in FX often re-emerge under new guises.
Support for the euro continues to stem from expectations that the ECB has reached the end of its easing path, while the Fed is widely expected to deliver three 25bp cuts by year-end. This contrast in policy trajectories has re-anchored EUR/USD to rate differentials, especially following last week’s dovish repricing of Fed expectations after softer U.S. labour market data.
German investor sentiment added another layer of support, with the ZEW expectations index rising to 37.3 in September from 34.7, suggesting cautious optimism about the economic outlook. While current conditions deteriorated as expected, forward-looking indicators point to a potential recovery, aided by fiscal expansion and accommodative ECB policy. Still, concerns linger over the delayed impact of higher U.S. tariffs on Germany’s export-heavy economy, which could temper the rebound narrative.
Technically, EUR/USD has breached a key resistance zone that could open the door to a test of the psychologically significant $1.20 threshold. Option markets appear to be positioning for such a move, with one-week risk reversals showing a steady uptick in demand for euro calls since the ECB signalled its pause.
However, euro bulls face a structural headwind: the fading rotation into European assets. According to Bank of America’s latest fund manager survey, enthusiasm for EU equities has waned, with the overweight position narrowing and the gap to U.S. equity underweights shrinking to its lowest since February. If equity inflows were a key tailwind for the euro in the first half of the year, their reversal could imply a more laboured path higher for EUR/USD in the months ahead.
GBP: Sterling breaches 1.36 – but can it hold?
GBP/USD has been testing the key resistance level at 1.36 throughout this year’s sterling rally, climbing ~9% year-to-date amid persistent USD weakness. The pair had only managed to break above it once – briefly at the end of June – until yesterday, when GBP/USD reached a two-month high of 1.3672.
Along with the widely expected dovish turn by the Fed, yesterday’s jobs report, and the just-released inflation data have further diminished the likelihood of easing by the Bank of England, supporting sterling. Markets are currently pricing in just a 0.1% probability of a cut at Thursday’s meeting. While headline inflation, both month-on-month and year-on-year, came in as expected, rising 3.8% from the previous year, it remains at its highest level in over 18 months – still well above the Bank’s 2% target.
Having said that, the pound’s grip on these highs appears fragile. Structural headwinds remain, and risk reversals – a gauge of sentiment toward a currency – continue to point to GBP-negative positioning further out. Only the 1-week tenor, reflecting this policy-heavy window, shows a preference for GBP over USD.
GBP/USD has its sights set on early-July highs above 1.37, with no major resistance thresholds standing in the way. Still, we remain skeptical about this target for now. Market expectations for the Fed have been highly speculative, with little concrete guidance from Powell himself – allowing a tone, perhaps more dovish than reality, to gain traction rapidly.
It’s likely that his tone today, while clearly more dovish, will reaffirm a Fed that is willing to cut, but still uncertain about the path ahead, with price pressures remaining a very real concern. In that case, GBP/USD could once again slip below 1.36.
The USD/CAD continues to lag behind all G-10
Table: Currency trends, trading ranges and technical indicators
Key global risk events
Calendar: September 15-19
All times are in EST.
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
