CashNews.co
So, there you have it—it’s official! After more than four years, the U.S. Federal Reserve has kicked off its rate-cutting cycle with an ‘outsized’ half-point or 50 basis point cut. That was the easy part. The challenges ahead are significant, as the Fed now seeks to prevent its previous rate hikes from pushing the economy, particularly the labor market, into negative territory. If it moves too quickly, it risks eroding the hard-won gains it has made against inflation. However, if it moves too slowly, it risks tipping the labor market into the red. The Fed is stuck between the proverbial rock and a hard place.
The rate cut has generally been a drag on the U.S. dollar, as the U.S. Dollar Index—a measure of the dollar against its major peers—came close to its lowest level since July 2023. However, the U.S. dollar regained some of its losses on Thursday morning when weekly unemployment claims came in better than expected, suggesting the Fed may proceed at a more moderate pace with its next rate cut.
Similarly, the Bank of Canada faces an uncertain path. The Bank cut rates in September by 25 basis points, but that was before Tuesday’s inflation report, which showed that the Canadian Consumer Price Index (CPI) rose at an annualized rate of under 2% in August—right on the Bank’s target rate for inflation. Does the Fed’s 50 basis point cut, along with August inflation at the target rate, give the Bank of Canada the green light for a half-point cut at its next meeting? Markets are betting on a 46% chance of the BoC cutting by 50 basis points.
Either way, slower inflation and more aggressive rate cuts by the BoC will make it difficult for the Canadian dollar to gain momentum. As a result, the USD/CAD currency pair will likely continue to seesaw in the short term.
The Canadian dollar is currently trading at 1.3587 CAD against the US Dollar.