USD/CAD Price Forecast: Edges higher above 1.3850, but bearish bias persists
- USD/CAD trades with mild gains near 1.3875 in Monday’s early European session.
- Traders brace for a rate hike from the Fed on Wednesday.
- The negative tone of the pair remains intact, but further consolidation cannot be ruled out with neutral RSI momentum.
- The immediate resistance level emerges in the 1.3920-1.3930 zone; the first downside target to watch is 1.3840.
The USD/CAD pair posts modest gains around 1.3875 during the early European trading hours on Monday. The US Dollar (USD) edges higher against the Canadian Dollar (CAD) amid rising expectations for a Federal Reserve (Fed) interest rate hike later on Wednesday.
Traders ramped up bets for a Fed rate hike after data on Friday showed US Consumer Price Index (CPI) inflation accelerated in August. The headline CPI rose 0.4% MoM in August, putting the 12-month increase at 3.4%, the Bureau of Labor Statistics reported Friday. These figures came in line with market expectations.
Meanwhile, the core CPI inflation, which excludes volatile food and energy prices, increased to 0.3% MoM in August from 0.2% in July, above the 0.2% forecast. The hotter CPI inflation data followed strong readings in several components of the Producer Price Index (PPI) released on Thursday, raising the specter of a Fed interest rate hike this week and supporting the Greenback.
Markets are now pricing in nearly 86% odds of an increase this week and another move higher later in the year, according to the CME FedWatch tool.
On the other hand, escalating tensions in the Middle East could boost crude oil prices and support the commodity-linked Loonie. Iranian state media claimed an Iranian commercial vessel was struck in the Strait of Hormuz on Saturday, per CNN.
Additionally, Saudi Arabia has faced escalating attacks from Iran-allied groups, including a Houthi strike on energy facilities in their efforts to control a second vital waterway in the region. It is worth noting that Canada is a major oil-exporting country, and high crude oil prices generally have a positive impact on the Loonie.
Canadian Dollar anchored as US–Canada spreads hold steady
Analysts at Scotiabank note that front-end rate differentials are offering some near-term support to the Canadian Dollar, despite heightened scrutiny of the Fed’s policy path. They point out that “front-end US/Canada spreads have held quite stable in the past few days, despite the elevated focus on US rate policy, which should provide some anchoring for the CAD in the short run.” This stability in short-term spreads is seen as a key factor helping to limit immediate downside for the currency, even as broader market attention remains fixed on US rate developments.
Technical Analysis: Negative outlook of USD/CAD remains intact in the near term
In the daily chart, USD/CAD retains a mildly bearish bias as it holds below the 100-day moving average (MA) and the upper Bollinger Band. Price is consolidating just above the Bollinger middle band, indicating underlying demand near that area, while the Relative Strength Index (14) at 49.9 stays neutral and suggests a lack of strong directional momentum.
On the topside, initial resistance is seen in the 1.3920-1.3930 zone, representing the upper boundary Bollinger Band and the 100-day MA. Any follow-through buying above this level could pave the way to the 1.4000 psychological level, en route to the August 4 high of 1.4080.
On the downside, immediate support emerges at the Bollinger middle band near 1.3840, ahead of a stronger structural floor at the lower Bollinger Band around 1.3760, where sellers could pause if the pair extends its retreat.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
Canadian Dollar FAQs
The key factors driving the Canadian Dollar (CAD) are the level of interest rates set by the Bank of Canada (BoC), the price of Oil, Canada’s largest export, the health of its economy, inflation and the Trade Balance, which is the difference between the value of Canada’s exports versus its imports. Other factors include market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – with risk-on being CAD-positive. As its largest trading partner, the health of the US economy is also a key factor influencing the Canadian Dollar.
The Bank of Canada (BoC) has a significant influence on the Canadian Dollar by setting the level of interest rates that banks can lend to one another. This influences the level of interest rates for everyone. The main goal of the BoC is to maintain inflation at 1-3% by adjusting interest rates up or down. Relatively higher interest rates tend to be positive for the CAD. The Bank of Canada can also use quantitative easing and tightening to influence credit conditions, with the former CAD-negative and the latter CAD-positive.
The price of Oil is a key factor impacting the value of the Canadian Dollar. Petroleum is Canada’s biggest export, so Oil price tends to have an immediate impact on the CAD value. Generally, if Oil price rises CAD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Oil falls. Higher Oil prices also tend to result in a greater likelihood of a positive Trade Balance, which is also supportive of the CAD.
While inflation had always traditionally been thought of as a negative factor for a currency since it lowers the value of money, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Higher inflation tends to lead central banks to put up interest rates which attracts more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in Canada’s case is the Canadian Dollar.
Macroeconomic data releases gauge the health of the economy and can have an impact on the Canadian Dollar. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the CAD. A strong economy is good for the Canadian Dollar. Not only does it attract more foreign investment but it may encourage the Bank of Canada to put up interest rates, leading to a stronger currency. If economic data is weak, however, the CAD is likely to fall.
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