USD/CAD Soars Ahead of Fed Decision as Rate Gap Widens

The USD/CAD exchange rate has risen to near a two-week high as markets position themselves for the Federal Reserve's interest rate decision on Wednesday. The pair currently sits at around 1.3898, extending gains for a fourth consecutive session.

Firmer oil prices have offered some support for the commodity-linked Canadian Dollar, but it remains under pressure from the widening yield gap with the US. According to the CME FedWatch Tool, there is a 92.7% probability of a 25-basis-point rate hike, which would take the federal funds target range to 3.75%-4.00%. This would further widen the interest rate divergence between the Fed and the Bank of Canada.

Historical analysis suggests that when the interest rate gap exceeds 150 basis points, USD/CAD typically gains an average of 2.8% over the following month. With Canadian inflation holding steady at 3% year-on-year in August and the Bank of Canada expected to keep rates steady through 2026 before raising them in 2027, the Canadian Dollar is highly vulnerable.