Canadian Dollar Maintains Momentum Against US Dollar Amid Rate Hike Expectations

The Canadian dollar is maintaining its momentum against the US dollar, with USD/CAD declining by approximately 0.7% over the last two trading sessions.

This bearish bias in favor of the Canadian currency is partly due to recent announcements from the Bank of Canada, which have shifted monetary policy expectations and reflected a loss of momentum in the US dollar.

The Bank of Canada's decision to leave interest rates unchanged at 2.25% was widely anticipated, but the tone adopted during the press conference was increasingly cautious regarding inflation, with policymakers highlighting that upside inflation risks have started to build due to higher oil prices and trade environment pressures.

Markets are now pricing in a possibility of a future rate hike, with some expectations models showing probabilities above 40% that the Bank of Canada could increase rates at its late-October meeting above the current level. This has been supportive of the Canadian dollar, as the prospect of higher interest rates improves the attractiveness of Canadian dollar-denominated investments and reinforces demand for the currency.