Bank of Canada Cuts Rates Amid Trade War Worries | Errante

Market Overview

The Bank of Canada (BOC) recently took a significant step by cutting its overnight interest rate by 25 basis points, bringing it down to 2.75%. This decision comes amidst increasing concerns about the impact of U.S. tariffs and trade-related uncertainty on Canada’s economic growth and price stability. While the Canadian economy ended 2024 on a strong note, with Q4 growth reaching a robust 2.6%, the ongoing trade war and rising inflation expectations have added complexities to the economic outlook. These factors have prompted the BOC to act preemptively to mitigate potential risks.

BOC Governor Tiff Macklem highlighted the challenges posed by the current economic environment. He emphasized that while monetary policy cannot offset the direct impacts of a trade war, measures must be taken to ensure inflation does not become a persistent problem. The BOC’s response reflects a balance between supporting growth and maintaining price stability, even in the face of a difficult and unpredictable global economic backdrop.

Fundamental Factors

Several key factors contributed to the BOC’s rate cut decision. Firstly, although inflation in Canada is currently near its 2% target, the recent imposition of U.S. tariffs has triggered concerns about rising costs and reduced economic activity. Short-term inflation expectations have also climbed, presenting additional challenges.

Secondly, while Canada entered 2025 in a relatively solid economic position, some BOC officials debated whether to maintain the rate at 3%, citing stronger-than-expected growth in recent quarters. However, heightened uncertainty surrounding trade policies and their potential impact on consumer and business confidence ultimately led to the decision to ease rates.

Governor Macklem openly acknowledged the difficulties in providing forward guidance during such volatile times. The trade conflict and its unpredictable developments make it challenging for the BOC to set clear expectations.

Technical Analysis

On the H1 chart, USD/CAD exhibits a clear “Power of Three” pattern influenced by recent price action. The daily candle from March 10th, often referred to as the “mother bar,” set a high at 1.4472, marking a key level of accumulation. The following candle on March 11th swept past the mother bar’s high, reaching 1.4519, representing a phase of manipulation. However, the price quickly retraced back into the mother bar’s range, indicating the start of a distribution phase. This series of movements completes the classic accumulation-manipulation-distribution cycle.

With ongoing fundamental uncertainties, traders should watch closely for the emergence of another “Power of Three” setup, as it may dictate the next directional bias for the pair. Key levels to monitor include 1.4472 and 1.4519, with a potential breakout or breakdown signaling significant momentum shifts. Continuation patterns within or outside this range will provide further clarity on the market’s direction.

Conclusion

The Bank of Canada’s decision to lower the interest rate reflects its commitment to navigating a complex economic environment. With U.S. tariffs driving inflation and weighing on growth prospects, the BOC is focused on striking a careful balance. While Canadians may experience weaker activity and rising prices in the short term, the central bank’s proactive measures aim to prevent inflation from becoming a long-term problem.

The path forward remains uncertain, and the BOC’s future decisions will likely depend on how the ongoing trade challenges evolve. For now, vigilance and adaptability will be critical as the Canadian economy faces these ongoing pressures.

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