Oil crossed $100 a barrel again Wednesday, the U.S. Federal Reserve delivered its first interest rate increase since 2023, and the Canadian dollar did neither of the things that combination usually produces. That gap, not the hike itself, is the story for Canadian portfolios heading into Thursday.
The Hike Everyone Expected, the Dot Plot Nobody Priced
The Federal Open Market Committee raised the target range for the federal funds rate by 25 basis points to 3.75 percent to 4.00 percent on Wednesday, its first increase since 2023 and a reversal after three consecutive cuts closed out 2025. The vote was unanimous. Markets had priced the move at better than 90 percent odds for more than a week, so the initial reaction was calm: the S&P 500 and Nasdaq were higher through the early afternoon.
The reversal came during a press conference by Chair Kevin Warsh. The Fed released updated economic projections showing 16 of 18 officials expecting at least one more hike before year end, more hawkish than markets had positioned for, and Warsh repeated that inflation has been too high for too long without offering forward guidance on the path. The S&P 500 gave back its gains to close down about half a percent, the Dow fell roughly 630 points, or 1.2 percent, and bank shares led the decline, with Bank of America and Wells Fargo each down about 3 percent. The 10-year Treasury yield, which had spent Tuesday testing the 5 percent level for the first time in nearly two decades, traded back above it as Warsh spoke.
The rate path itself is the cleanest way to see how sharp the reversal was: after three quarter-point cuts closed out 2025, the move on Wednesday is the first hike in three years.
The Fed cut three times to close out 2025, then held for six straight meetings before reversing course Wednesday. Source: Federal Reserve.
Energy Got Its Lift. The Loonie Did Not.
The mechanism that normally connects a Middle East energy shock to Canadian portfolios is direct: oil above $100 a barrel lifts TSX energy names and typically supports the Canadian dollar, since Canada is a net crude exporter. The first half held Wednesday, with Canadian Natural Resources, Suncor and Cenovus among the stronger names in the session as WTI held above the century mark for the first time since May. The second half did not. USD/CAD was little changed near 1.39, essentially where it sat before the Fed decision, because the same hawkish dot plot that hit U.S. equities pushed the U.S. dollar broadly higher against every major currency, not just the loonie. The usual currency lift from oil was there. It was matched, and then some, by a stronger U.S. dollar working against it.
That divergence reached the TSX through its largest sector weight. Financials, not energy, set the tone on the Toronto exchange on a day like this. The same tightening-for-longer signal that dragged down Bank of America and Wells Fargo in New York applies with equal force to Royal Bank, TD and the rest of the Canadian banks, which carry a heavier weight on the S&P/TSX Composite than energy does. The index had already given back nearly 1,400 points since its August 25 high before trading began on Wednesday.
The TSX Composite has been in a steady retreat since late August, a decline that predates Wednesday and reflects the same tightening financial conditions that culminated in the Fed decision.
The retreat from the Aug. 25 peak predates Wednesday and reflects tightening financial conditions into the Fed decision, not a single-day reaction. Source: TMX Group.
The Timing Problem for the Ottawa-Europe Pivot
Wednesday was also the date Canada and the European Union chose to formalize a new strategic alliance covering trade, defence and technology. The move, led personally by Prime Minister Mark Carney, aims to reduce dependence on a United States relationship that has deteriorated over tariffs since last year. Carney has been explicit that Canada is not seeking EU membership, describing the goal instead as a unique alliance that keeps energy, critical minerals and defence supply chains moving more freely between the two.
A weaker or flatter Canadian dollar is not a neutral backdrop for that project. Every infrastructure commitment under discussion, from undersea cables to new terminals for shipping Canadian energy to Europe, gets priced in a currency environment, and a loonie that cannot hold its usual ground against a broadly stronger U.S. dollar buys less negotiating room than one that can. The Bank of Canada has already flagged the tariff dispute itself as a drag on business confidence. A Fed that just signalled a longer tightening path adds a second, currency-side headwind to the same file, on the same day Ottawa is trying to demonstrate economic independence from Washington. Thursday morning starts with that tension unresolved: the diplomatic case for the European pivot got stronger this week, and the currency case for it got harder.