The US Dollar is rebounding against the Canadian Dollar, climbing to session highs around 1.3950, as broader Greenback strength emerges amid renewed optimism over a Sino-US trade agreement and a hawkish tone from the Federal Reserve.
After touching one-month lows near 1.3880 on Wednesday, the USD/CAD pair extended gains, briefly testing resistance at 1.3954, with buyers maintaining control in early Thursday trading.
Sino-US Trade Optimism Lifts Sentiment
Market sentiment improved following reports that US President Donald Trump and Chinese President Xi Jinping reached an agreement to lower tariffs on Chinese goods. In return, China pledged to resume US soybean purchases, maintain rare-earth exports, and crack down on illegal fentanyl trade.
Although official details remain limited, Trump called the meeting “amazing,” while Xi described the discussions as having reached a consensus on “important economic and trade issues,” according to China’s Xinhua News Agency.
Fed’s Hawkish Stance Supports the Dollar
The US Dollar gained additional strength after the Federal Reserve’s policy decision on Wednesday. As expected, the Fed cut interest rates by 25 basis points, but Chair Jerome Powell signaled that a December rate cut is not guaranteed, which investors interpreted as a hawkish message, sending the Greenback higher against its major peers.
BoC’s ‘Hawkish Cut’ Provides Temporary CAD Support
Earlier in the session, the Bank of Canada (BoC) also cut its benchmark interest rate by 25 basis points to 2.25%, meeting market expectations. However, Governor Tiff Macklem struck a surprisingly hawkish tone in his press conference, suggesting that the BoC may be nearing the end of its easing cycle, which briefly supported the Canadian Dollar before US Dollar strength took over.
Central Banks: Key Insights
Role of Central Banks:
Central banks are tasked with maintaining price stability by controlling inflation and ensuring sustainable economic growth. Major institutions such as the Federal Reserve (Fed), European Central Bank (ECB), and Bank of England (BoE) typically aim to keep inflation close to 2%.
Policy Tools:
The main instrument used to manage inflation is the policy interest rate. Raising rates (monetary tightening) cools inflation and slows borrowing, while cutting rates (monetary easing) stimulates spending and investment. Central banks communicate policy changes during scheduled meetings, influencing lending, saving, and investment behaviors across the economy.
Decision-Making Process:
Most central banks operate independently of political influence. Policy boards consist of members with differing views:
- Doves favor lower rates to encourage growth, even at the cost of slightly higher inflation.
- Hawks prefer higher rates to control inflation and reward saving.
The central bank governor or chairperson leads meetings, builds consensus, and has the final say in case of a tie. Ahead of major policy announcements, a blackout period prevents members from making public comments to avoid market disruption.
