USD/CAD Falls to 1.3800 as Dovish Fed Outlook, Trade Tariff Risks Deter Dollar
USD/CAD dropped towards 1.3800 in Monday’s Asian session as dovish hopes surrounding the Federal Reserve’s September policy meeting dented the US Dollar. Weaker US economic reports, such as falls in consumer sentiment, and slower retail sales growth, solidified expectations for a Fed rate cut. Meanwhile, the Trump administration’s widened tariffs on steel, aluminum, and semiconductor imports further clouded the US outlook. The Bank of Canada, in contrast, has less need to rush policy easing, with its trimmed mean inflation maintaining at 3% in June, leading it to remain cautious notwithstanding the recent rate cuts. KEY LOOKOUTS • Weaker US data reinforces market expectations of a September Federal Reserve rate cut. • Trump’s extension of tariffs on steel, aluminum, and semiconductors has the potential to spur additional economic headwinds. • Canada’s trimmed mean inflation at 3% dampens pressure for the Bank of Canada to accelerate rate cuts. • The pair is near 1.3800, losing impetus following two successive days of advances, with sentiment leaning against the US Dollar. USD/CAD dipped lower to the vicinity of 1.3800 on Monday as dovish speculation about the Federal Reserve’s policy trajectory put pressure on the US Dollar. Downbeat US data, such as decreased consumer sentiment and weaker retail sales, contributed to rate cut speculation in September, while freshly widened US tariffs on steel, aluminum, and semiconductors posed additional negative risks. Conversely, the inflation of Canada is still sticky at 3% based on the trimmed mean metric, leaving the Bank of Canada with not much hurry to re-start easing after its July rate reduction, thus offering some relative support to the Canadian Dollar. USD/CAD fell to close to 1.3800 as dovish Fed hopes and softer US data weighed on the Dollar. That said, Canada’s solid 3% trimmed mean inflation took the heat out of further aggressive BoC rate cuts, providing some support to the Loonie. • USD/CAD fell back to close to 1.3800 in Monday’s Asian trading after two consecutive days of gains. • Dovish Fed expectations increased with weaker US consumer sentiment and softer retail sales information hinting at a September rate cut. • Michigan Consumer Sentiment Index fell to 58.6 in August, below expectations of 62.0 and from July’s 61.7. • US Retail Sales slowed, increasing 0.5% in July compared to 0.9% in June, affirming cooling demand. • Trump administration widened tariffs on steel, aluminum, and semiconductor imports, introducing economic uncertainty. • Trimmed mean inflation in Canada was at 3% in June, remaining wary of the Bank of Canada even after a July cut to 2.75%. • Relative policy divergence between the Fed and BoC favored the Canadian Dollar versus the US Dollar. • The USD/CAD is trading around 1.3800 on a change in market mood based on expectations about monetary policies in the US and Canada. Recent US statistics, such as diminished consumer sentiment and decelerating retail sales, have spurred speculation that the Fed could proceed with a rate cut in September. Concurrently, the Trump administration’s announcement of expanding tariffs on steel, aluminum, and semiconductors has placed increased pressure on the economic picture, worrying traders and investors. USD/CAD DAILY PRICE CHART SOURCE: TradingView Canadian inflation continues high, with the Bank of Canada’s trimmed mean gauge still at 3% in June. Although the central bank reduced its policy rate to 2.75% in July, policymakers have taken a cautious tone on future action. Persistent service prices and risk premia embedded in global trade tensions make it less likely that the BoC will be in a hurry to offer further easing. This conservative position lends the Canadian Dollar a relative strength, even as underlying economic woes continue to unfold in both economies. TECHNICAL ANALYSIS USD/CAD is respecting the 1.3800 psychological level, where nearby support is apparent. A consistent break below this can open up more losses towards the 1.3760–1.3740 area. To the upside, resistance lines up around 1.3840–1.3860, followed by the 1.3900 handle, which continues to be a major hurdle for buyers. The general bias remains tilted in favor of weakness as long as the pair remains below the 1.3900 handle, with the traders keeping a keen eye on whether the pair can hold at support or continue its corrective trend. FORECAST If USD/CAD can hold at or above the 1.3800 support region, a bounce could be observed towards the 1.3840–1.3860 resistance zone. A clean break above this range would likely set the stage for a test of the 1.3900 handle, which is still a major obstacle for additional bullish pressure. Improved US data or any alteration in Fed speak away from imminent rate cuts could also be a source of support for the US Dollar, pushing the pair higher. Conversely, a failure to hold above 1.3800 would probably attract additional selling pressure, taking the pair down to 1.3760 and then 1.3740 levels. A clean break below these supports might prolong the fall towards 1.3700, indicating greater weakness in the near term. Weaker US economic releases or escalating trade tensions can support the bearish outlook, with preference for further Canadian Dollar gains against the US Dollar.