Canadian Dollar dips as Fed, US yields support the US Dollar

• USD/CAD advances around 1.4000, supported by a firmer US Dollar following the Fed’s interest rate hike.
• The rebound in Oil prices supports the Canadian Dollar and limits the pair’s upside.
• US Treasury yields rise as inflation risks fuel expectations of further interest rate hikes.

USD/CAD edges higher on Friday, trading around 1.4000 at the time of writing, up 0.10% on the day. The US Dollar (USD) remains supported by expectations of further interest rate hikes from the Federal Reserve (Fed), while the rebound in US Treasury yields adds to the Greenback’s appeal.

The Fed raised its benchmark interest rate by 25 basis points (bps) on Wednesday to a range of 3.75%-4%, delivering its first rate hike since 2023. The decision came as rising energy prices keep inflation risks elevated and encourage the US central bank to maintain a restrictive monetary policy stance.

The latest interest rate projections reinforce this outlook. Sixteen of the 18 Fed officials expect at least one additional rate hike this year, suggesting that borrowing costs could remain elevated for an extended period.

Investors now see around a 55% chance of another 25 bps rate increase at the October meeting, according to the CME FedWatch tool. The repricing of the US monetary policy outlook also supports US Treasury yields. The benchmark 10-year yield rebounds to around 4.98%, approaching the 5.04% peak reached on Tuesday, its highest level since 2007.

Against this backdrop, the US Dollar maintains positive momentum. The US Dollar Index (DXY), which tracks the Greenback against a basket of six major currencies, trades above 100.50, around its highest level in seven weeks.

On the Canadian side, the rebound in Oil prices provides some support to the Canadian Dollar (CAD), limiting gains in USD/CAD. West Texas Intermediate (WTI) Oil recovers to around $97.30 at the time of press, after hitting an intraday low of $94.63.

Persistent tensions in the Middle East continue to keep energy supply risks elevated. Concerns are particularly focused on the Strait of Hormuz, while the prospect of renewed escalation between the United States (US) and Iran maintains a geopolitical risk premium in Oil prices.

CAD hovers near 1.40 as wider US–Canada spreads weigh ahead BoC remarks

Strategists at Scotiabank note that the Canadian Dollar is “flirting with the 1.40 level in early trade Friday, with the currency down very slightly on the day,” with “minor losses” reflecting “the bullish USD undertone overall rather than anything CAD-specific.” They add that “broader risk appetite looks a little soft, with European stocks lower while US equity futures are slightly positive.”

Scotiabank points out that “crude oil prices are lower on the day also but wider US/Canada front-end spreads are the biggest drag on the currency.” The team judges that “spot does remain somewhat overvalued relative to our fair value estimate (1.3910),” and cautions that, “at the margin, the weaker CAD is unhelpful for the BoC as it considers building inflation risks.”

Looking ahead, Scotiabank highlights that “Governor Macklem is speaking on Monday in Halifax and may reiterate concerns about intensifying upside risks to inflation.” In their view, “strengthening bets on tighter BoC policy before year end would provide some anchoring for the CAD.”

USD/CAD technical analysis

In the one-hour chart, USD/CAD trades at 1.4007, maintaining a constructive bullish tone as it holds above the 100-period simple moving average (SMA) near 1.3951 and the 200-period SMA around 1.3886. The pair is pressing the upper end of the recent range, with initial overhead supply emerging at the horizontal resistance at 1.4015, while the Relative Strength Index (14) around 63 suggests firm but not yet overextended upside momentum.

On the downside, immediate support appears at 1.3974, ahead of a cluster of underlying demand formed by the 100-period SMA at 1.3951 and the horizontal level at 1.3945, with deeper structural support located at the 200-period SMA near 1.3886. On the topside, a break above the first barrier at 1.4015 would open the path toward the next resistance at 1.4030, where buyers may start to lose traction if momentum fails to strengthen further.

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