Canadian Dollar steadies as falling Oil offsets US Dollar weakness

• USD/CAD trades around 1.3940 on Thursday, virtually unchanged on the day.
• US producer inflation cools more than expected in July, while Initial Jobless Claims increase.
• Oil prices fall below $80, weighing on the Canadian Dollar and preventing USD/CAD from fully reflecting US Dollar weakness.

USD/CAD trades around 1.3940 on Thursday at the time of writing, virtually unchanged on the day. The pair remains caught between two opposing forces: The US Dollar (USD) weakens following softer-than-expected US data, while the Canadian Dollar (CAD) struggles amid falling Oil prices.

Pressure on the Greenback intensified following the release of the United States (US) Producer Price Index (PPI). Producer prices were unchanged on a monthly basis in July, following a revised 0.1% decline in June and compared with the 0.2% increase expected by markets. On an annual basis, the PPI slowed sharply to 4.7% from 5.5% in June, below the 4.9% market consensus. Underlying inflationary pressures also show signs of moderation. The core PPI, which excludes more volatile components, rose 0.2% MoM in July, following a revised 0.4% increase in June and below the 0.3% expected. On an annual basis, the indicator slowed to 4.2% from 4.7% previously.

These figures reinforce the disinflationary signal delivered by Wednesday's Consumer Price Index (CPI) data. The simultaneous easing in consumer and producer inflation reduces pressure on the Federal Reserve (Fed) to maintain a restrictive monetary policy stance.

US labor market data released on Thursday also provide limited support to the US Dollar. Initial Jobless Claims rose to 209K for the week ending August 8, up from 200K in the previous week and above the 202K expected. Continuing Jobless Claims, however, declined by 22K to 1.777M for the week ending August 1.

Against this backdrop, US Treasury yields declined, while the US Dollar Index (DXY), which tracks the value of the Greenback against a basket of six major currencies, slipped back below the 100 mark after reaching a two-week high earlier on Thursday. The US two-year Treasury yield trades around 4.14%, its lowest level since July 17.

However, US Dollar weakness is not enough to trigger a significant decline in USD/CAD. The Canadian Dollar remains under pressure as West Texas Intermediate (WTI) US Oil falls back below $80 on Thursday at the time of press. As Canada is a major Oil exporter, lower energy prices tend to weigh on its currency.

Geopolitical risks could nevertheless limit the downside in Oil prices. US President Donald Trump said that the United States (US) has “total control” over the strategic waterway amid persistent tensions between Washington and Tehran and stalled diplomatic talks. The Trump administration is also seeking to increase economic pressure on Iran, including through broader sanctions and measures aimed at restricting Iranian Oil exports.

USD/CAD therefore remains close to equilibrium around 1.3940, as easing US inflation, higher jobless claims and falling Treasury yields weigh on the US Dollar, while weaker Oil prices simultaneously put pressure on the Canadian Dollar.

Barkin flags embedded price pressures but stops short of clear rate-hike signal

Fed's Barkin delivers a moderately cautious message, with a 6/10 FXS Speechtracker score only slightly above the 5.8/10 historical average, signaling a tone broadly in line with the established baseline. The key remark that it is "still an open question" whether further rate hikes are needed underscores genuine uncertainty around the path back to 2% inflation, balancing concerns about embedded price pressures against arguments that inflation will ease as shocks fade and compensation remains modest. Overall, the speech leans mildly hawkish on inflation risks but is tempered by acknowledgment that many at the Fed see current policy as already restrictive enough to bring inflation down.

The FXS Fed Sentiment Index fell 2.36 points to 135.56, indicating a modest pullback in perceived hawkishness following the speech. Despite the decline, the index remains firmly above the neutral 100 level, showing that Fed communication is still interpreted as hawkish overall, even as Barkin's nuanced tone slightly softens the stance compared to prior readings.

Hammack’s hawkish push for immediate rate hikes lifts Fed tone

Fed’s Hammack delivered a distinctly more hawkish message, with the FXS Speechtracker score at 8.2/10 versus a 7.3/10 historical average, underscoring a stronger-than-usual emphasis on tightening. The repeated call to “raise rates right now,” framed against a stable labor market, broad-based inflation and non-restrictive policy conditions, signals a clear preference for front-loaded hikes to prevent overheating. This combination of resilient growth, business optimism and a stated need for monetary restraint is likely to be interpreted as supportive for the Dollar and negative for risk-sensitive assets.

The FXS Fed Sentiment Index rose by 1.33 points to 137.92, reinforcing that the overall Fed tone remains firmly in hawkish territory well above the neutral 100 line. The alignment of a higher index reading with an elevated FXS Speechtracker score confirms that Hammack’s remarks have nudged market expectations toward a more aggressive policy path, with implications for Dollar strength and higher front-end yields.

Canada’s loonie eyes recovery as BoC outlook improves and real economy slowly heals

Commerzbank’s economists stress that the recent improvement in Canada’s external and growth data owes little to the latest energy price spike. They note that “while it is true that US exports in particular have risen significantly since March - a trend that is almost certainly attributable to the conflict in Iran - these figures are not price-adjusted. In real terms, energy exports reached their lowest point in August last year and have been rising steadily ever since; the trend since March has been more of a continuation than an acceleration.”

In their view, the broader backdrop is one of a gradual, domestically driven recovery. “Labour market figures also suggest that a low point was reached last summer. The goods-producing sector accounts for only a small part of the labour market anyway, and within the energy sector, only a very small proportion of the workforce is employed,” they write, adding that “while a positive impact from the oil and gas sector on GDP was observed in April and May, this was not the case in March, when energy prices rose most sharply. Canada’s recent return to stronger growth was therefore primarily due to other sectors.”

Commerzbank concludes that “the Iran conflict cannot change this. It is only once the Canadian real economy has recovered sustainably that the Bank of Canada is likely to consider interest rate hikes, and it is only then that the CAD is likely to recover.” In short, they argue, “the figures suggest that the real economy is slowly recovering for other reasons. The recovery in the PMIs, the rise in exports and stronger growth suggest that uncertainty surrounding tariffs is gradually easing. While this means that the oil price is a decisive factor for the CAD in the short term, in the medium term it is likely to be the negotiations with the US that determine whether the upturn is sustainable.”

USD/CAD technical analysis

In the one-hour chart, USD/CAD trades at 1.3940 with a mildly bearish near-term bias, as price holds beneath the 100-period simple moving average (SMA) at 1.3943 and the 200-period SMA at 1.3990. The pair is attempting to stabilize after the break above the downward resistance trend line, now offering nearby support around 1.3927, while the Relative Strength Index (RSI) at 48.99 stays close to neutral, hinting at consolidative rather than impulsive momentum.

On the topside, initial resistance aligns with the 100-hour SMA at 1.3943, followed by the horizontal barrier near 1.3964 and then the more significant 200-hour SMA at 1.3990, which caps the broader recovery attempts. On the downside, immediate support is seen around the former trend-line around 1.3927, ahead of the horizontal floor at 1.3908; a sustained move below this latter level would reinforce the bearish tone and open the way to deeper hourly losses.

(The technical analysis of this story was written with the help of an AI tool. Know more.)