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The Canadian dollar strengthened to around 1.40 per USD from the two-week high of 1.42 on July 27th after the Federal Reserve held rates unchanged. The decision weakened the greenback as around one third of the market was positioned for a hike. Earlier this month, the BoC held its policy rate at 2.25% for a sixth straight meeting. The bank noted that the economy was adjusting to recent shocks and that energy-driven inflation pressures were easing, although some policymakers questioned the durability of the recovery and warned about rising inflation expectations. However, the decision preceded US President Trump’s threat of additional tariffs on Canadian imports and the latest escalation in US-Iran tensions.

Canadian Dollar Strengthens After Fed Hold

US stocks fell on a choppy Wednesday as markets assessed the Federal Reserve’s policy outlook ahead of major tech earnings. The S&P 500 and the Nasdaq 100 fell 0.7%, while the Dow lost 900 points. Microsoft and Meta were muted ahead of their earnings reports after the bell, the latest signal for AI infrastructure spending. Concerns that AI capital expenditure is being overdone recently pressured Magnificent 7 stocks and triggered a selloff for chip producers that trimmed their surge late last quarter. Micron, Applied Materials, and Sandisk sank between 4% and 8% amid the pessimistic results by SK Hynix. Meanwhile, the Fed held rates unchanged in the least certain meeting in the last 15 years, featuring three dissents for a hike. The Dow was pressured by a flare-up in oil prices following fresh strikes between Iran and the US, adding to pro-inflationary risks. Visa rebounded and gained 1% after posting growth in revenue last quarter.

US Stocks Resume Slide

The euro edged higher to approach $1.15, trading at a two-week high, as the US dollar weakened after the Fed left interest rates unchanged, broadly in line with expectations, despite markets assigning roughly a one-in-three probability to a rate hike. While the central bank reaffirmed its commitment to price stability, it offered little in the way of forward guidance. In the euro area, money markets are pricing in nearly two 25-basis-point ECB rate hikes by March 2027. ECB policymaker Peter Kazimir said at least one more increase will likely be needed to bring inflation under control, adding that a weaker economic outlook could warrant even more tightening than markets currently expect. Meanwhile, Chief Economist Philip Lane said the current inflation shock remains moderate, supporting further policy tightening. Investors now await euro area inflation data later this week for fresh clues on the ECB's policy path.

Euro at 2-Week High

Gold prices rebounded to the $4,100 per ounce mark on Wednesday from the nine-month low of $3,975 from the middle of July after the Federal Reserve maintained its interest rates steady. The decision was consistent with what only a portion of the market was positioned for, with three members of the FOMC dissenting to a rate hike. The hold brought some relief to bullion investors, as higher interest rates reduce demand for assets that bear no yield. In the meantime, demand for safe-haven assets was supported by a new wave of strikes in the Middle East. Iran attacked US forces across the Persian Gulf and energy infrastructure in Saudi Arabia. Elsewhere, the Bank of England and the Bank of Japan are also expected to keep rates unchanged this week while maintaining a cautious stance on inflation.

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