Prior to the Fed's decision, the USD/CAD bulls retain control

After Bank of Canada (BoC) Governor Tiff Macklem announced that he believes the policy rate would need to increase further, the Canadian dollar remained relatively stable. The USD/CAD exchange rate is 1.3628 at the time of writing, after moving between 1.3622 and 1.3635.

Governor Macklem noted that there has not yet been a general decline in pricing pressures and that there are no simple measures for restoring price stability. Since last week's interest rate announcement, the Bank of Canada has already reduced the pace of its tightening.

In recent statistics, industry-level Gross Domestic Product surprised to the upside with a 0.1% MoM gain for August, slightly over market expectations but, as analysts at TD Securities highlighted, "hardly scorching and Q3 GDP is still tracking in line with Bank of Canada predictions (after revisions). While this data was promising, it will not be enough to convince the Bank that the outlook has deteriorated, and we continue to anticipate a 25-basis-point cut in December.

As it is believed that the Federal Reserve would declare a slower rate of tightening at its upcoming meeting, the US dollar fell against key currencies on Tuesday. The Federal Reserve is widely predicted to increase its overnight lending rate by 75 basis points (bps) to a range of 3.75 to 4.00 percent, the fourth straight increase. In December, however, the fed funds futures market has priced in a 57% chance of a 50-bps increase in response to comments from Fed members indicating a possible slowing of the tightening pace. This is less than the roughly 70% chance that existed last Friday. In response to statements and interviews by Fed members signaling that the central bank may implement fewer rate hikes after Wednesday's meeting, the US dollar index has recently began to register lower daily highs.