The Bank of Canada is expected to hold its policy rate at 2.25% for a fourth meeting, as it monitors the effects of the US-Iran war on inflation and growth. The Bank removed guidance in March that the current rate was appropriate, while noting weaker first-quarter growth and near-term price pressure from the energy shock.
Canada’s CPI rose to 2.4% year-on-year in March from 1.8% in February, above the 2% target but below the 2.5% market forecast. The Bank’s projections see inflation at 2.2% by year-end and 2.1% in 2027.
Inflation Growth Trade Uncertainty
Growth data has weakened, alongside uncertainty in Canada’s trade relationship with the US. GDP contracted at a 0.6% annualised pace in Q4 2025, monthly GDP rose 0.1% in January, and the seasonally adjusted IVEY PMI moved into contraction in March.
The policy decision is due Wednesday at 13:45 GMT, followed by a press conference at 14:30 GMT. A Reuters report said markets are pricing a hold after April, and 76% of polled analysts expect no policy change in 2026.
USD/CAD peaked near 1.4000 in late March, touched 1.3605, and Monday’s low was 1.3597. Levels cited include resistance above 1.3700 and 1.3800, and support near 1.3525.
With the Bank of Canada meeting this Wednesday, we expect them to hold the policy rate at 2.25%. The bank is in a tough spot, balancing the need to see how the US-Iran conflict impacts the economy against signs of slowing growth. This stability suggests that trading strategies based on a sudden Canadian interest rate move are unlikely to be profitable in the near term.
Trading Strategy For USDCAD
The main issue is the conflict between rising inflation and weakening economic activity. March’s inflation hit 2.4%, pushed higher by energy prices, yet recent data for February’s retail sales showed only a 0.2% increase, confirming the economy lost momentum after contracting in the fourth quarter of 2025. This gives the BoC a clear reason to wait for more information before considering any change in policy.
Elevated energy prices are the key variable, with WTI crude oil holding steady around $95 a barrel, a significant jump from the $82 average we saw for much of 2025. Governor Macklem has indicated he is willing to look past this short-term inflation spike, believing it will cool down later this year. This approach suggests the bar for a surprise rate hike is very high.
We have seen this kind of policy patience before, especially when we look back at how central banks responded in 2022 to what they initially called “transitory” inflation. The BoC is again choosing to wait for confirmation that price pressures are becoming embedded before acting, especially with growth being so fragile. This historical precedent reinforces our view that the bank will remain on hold for several more meetings.
The main opportunity for traders will likely be in the currency markets, specifically the USD/CAD pair. With the BoC on hold, the direction of the pair will heavily depend on the US Federal Reserve’s decision, also happening this Wednesday. The recent trend for USD/CAD has been bearish, and rallies toward the 1.3700 level should be seen as opportunities to position for further Canadian dollar strength.
Given the strong resistance expected around 1.3700, a practical response for derivative traders is to consider selling USD/CAD call options with strike prices at or above this level. This strategy benefits from the pair either falling or moving sideways, which aligns with the view of a steady BoC and a continuation of the recent bearish trend. Volatility is expected around the meetings, but the established downward channel is likely to hold.
