Canadian Dollar Drops Again as Bank of Canada Holds Rates Steady Amid Inflation and Trade Concerns

The Canadian Dollar (CAD) extended its losing streak for a fifth straight day on Wednesday, slipping further against the U.S. Dollar (USD). The drop followed the Bank of Canada’s (BoC) decision to leave its benchmark interest rate unchanged at 2.75%, as expected. Concerns over stubborn inflation and trade-related uncertainty are adding pressure on the currency.

BoC Maintains Rates at 2.75% Amid Inflation Worries

As markets anticipated, the BoC held interest rates steady, pointing to ongoing core inflation that remains above its 3% target. While overall inflation is cooling, core metrics—driven by wage growth and strong consumer spending—remain elevated, prompting caution from the central bank.

In its official statement, the BoC said it sees “clear signs” of slowing economic activity, but it remains focused on inflation risks, which could still move higher if consumer spending doesn’t ease.

USD Gains as CAD Falls to 2-Month Low

At the time of writing, the USD/CAD pair has surged to 1.3810, its highest level since May 30, posting a weekly gain of over 0.70%. The broader strength of the U.S. Dollar, supported by upbeat economic data, is amplifying the Canadian Dollar’s weakness.

The BoC’s cautious stance—combined with the stronger outlook for the U.S. economy—is pushing investors toward the Greenback. This divergence in economic momentum between the two countries is fueling bullish momentum in USD/CAD.

BoC Flags Trade Tensions with the U.S. as a Downside Risk

The central bank also highlighted uncertainty in trade relations with the United States as a key concern. Although some U.S. trade policies have become clearer, threats of new tariffs and shifting negotiations remain a risk to Canada’s economic stability.

“Trade discussions are still fluid, and the potential for targeted U.S. trade actions presents a downside risk,” the BoC noted in its policy update.

Rate Cuts Possible Later in 2025, Say Economists

While the BoC held firm in July, it did not rule out future rate reductions. A Reuters poll of economists shows that 18 out of 28 believe the central bank may cut rates as early as September, likely by 25 basis points. Meanwhile, 17 economists expect at least two more cuts by the end of the year, with a few predicting as many as three before 2026.

This outlook keeps markets on edge as they try to assess when the BoC might shift from holding to easing.

All Eyes Now on Macklem’s Speech and Fed’s Rate Decision

Attention now turns to BoC Governor Tiff Macklem, who will speak at a press conference following the rate decision. He is also expected to unveil the Monetary Policy Report (MPR), offering fresh insights into the bank’s inflation and growth forecasts.

At the same time, global markets are watching the U.S. Federal Reserve, which is also set to announce its policy stance later on Wednesday. While the Fed is likely to keep rates steady, traders will be watching for any hawkish signals that could push the U.S. Dollar even higher, adding more pressure to the Loonie.

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