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USD/CAD Extends Losses with Crude Oil Strength and Dovish Fed Outlook

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  • May 22, 2025
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USD/CAD currency pair continues to trade with a bearish trend, extending losses for the fourth day in a row in response to bolstering crude oil prices and reduced prospects for a Bank of Canada rate reduction. The Canadian Dollar is supported by warmer-than-anticipated domestic inflation numbers, whereas the US Dollar continues to suffer due to dovish Federal Reserve hopes, fresh US-China trade tensions, and increasing fiscal worries after a US credit rating downgrade. Technically, a break below the critical 1.3900 support and rejection from the 200-day SMA further increase the bearish outlook, making the pair susceptible to greater losses in the near term. KEY LOOKOUTS • More robust than expected Canadian core inflation has taken some sting out of the chances of a near-future rate cut by the Bank of Canada, offering underlying support to the Loonie. • Being a commodity-linked currency, the Canadian Dollar is inextricably linked with oil prices. Any persistent rise in crude oil—under geopolitical tensions or supply issues—can further buoy the CAD. • Traders are waiting for forthcoming US macro data, such as flash PMIs, for signals on the Federal Reserve’s interest rate trajectory, with dovish sentiments keeping the USD under pressure. • The inability of the pair to remain above the 1.3900 level and rejection against the 200-day SMA indicate sustained bear pressure, with more falls to come should support at 1.3810 be broken. Traders should closely monitor key drivers influencing the USD/CAD pair, including the impact of elevated Canadian inflation on the Bank of Canada’s rate path, which currently tilts against a near-term rate cut and supports the Loonie. Crude oil prices remain a crucial factor, with recent gains driven by geopolitical uncertainty continuing to bolster the commodity-linked Canadian Dollar. In the meantime, the US Dollar remains under pressure from dovish expectations about the Federal Reserve and the issue of US fiscal stability, particularly after being downgraded by Moody’s credit rating. From a technical perspective, the pair’s inability to retake the 1.3900 level and its rejection of the 200-day SMA support a bearish direction, with traders on high alert for a possible break below the 1.3810 support area. USD/CAD is under pressure as increasing oil prices and higher Canadian inflation support the Loonie. Dovish Fed expectations and US fiscal worries weigh on the US Dollar, while a decline below 1.3810 could indicate further declines for the pair. •  USD/CAD is trading with a bearish bias, extending its losses for the fourth day running. •  Reversal in crude oil prices supports the Canadian Dollar owing to its commodity-linked nature. •  Higher-than-anticipated Canadian inflation lowers the prospect of a June cut by the Bank of Canada. •  US Dollar declines in line with dovish Federal Reserve hopes and increasing fiscal worries. •  US sovereign credit rating downgrade by Moody’s adds to pressure on the USD. •  Technical breakdown under 1.3900 and rejection from the 200-day SMA indicate sustained downside risk. •  Focus turns to US macro data due later in the day and global flash PMIs for new trading signals. The USD/CAD currency pair is still saddled by wider macroeconomic considerations affecting the US Dollar as well as the Canadian Dollar. On the Canadian front, recent inflation numbers were higher than anticipated, lowering the potential for an instant interest rate reduction by the Bank of Canada. This has bolstered faith in the Loonie, particularly when coupled with the recovery of crude oil prices, which are the backbone of Canada’s economy. Stronger oil prices, underpinned by geopolitical tensions like uncertainty over US-Iran nuclear talks, still provide support to the Canadian Dollar. USD/CAD DAILY PRICE CHART CHART SOURCE: TradingView On the American side, the Dollar is under constant pressure because of escalating fiscal worries and weakening expectations regarding upcoming interest rate increases by the Federal Reserve. Moody’s sovereign downgrade of the US credit rating and anxieties regarding swelling deficits have triggered caution among investors. Furthermore, tensions between the US and China have reemerged, also placing the USD under increased risk aversion, adding to the pressure on the currency. Market participants are now intently following future economic indicators, including US macro data and world flash PMIs, for clues that may affect the policy direction and investor appetite in the future. TECHNICAL ANALYSIS USD/CAD is still under pressure after it was unable to stay above the key 1.3900 level and was rejected close to the 200-day Simple Moving Average (SMA), indicating bearish momentum. The recent breakdown of the pair below a short-term consolidation area indicates a change in sentiment in the direction of sellers. If the support area of 1.3810–1.3800 is broken convincingly, it may pave the way for a further decline towards the next significant support levels. Momentum indicators also have a negative bias, supporting the possibility of further downside in the short term. FORECAST USD/CAD is able to remain above the 1.3800 support area and experiences fresh buying interest, a bounce towards the 1.3900 level may be in the pipeline. A move above this area would invite new bullish interest, with the potential to see the pair return to the 1.3950–1.3980 zone. To experience an ongoing upside drive, the pair would have to regain and stay above the 200-day SMA, currently serving as a major resistance. Positive surprises in future US economic data or a recovery in US Treasury yields would also be able to sustain a USD recovery, causing the pair to strengthen in the near term. Conversely, a strong break below the 1.3810–1.3800 support will likely lead to a deeper correction, exposing the next downside targets at 1.3750 and maybe 1.3700. Ongoing rigidity in crude oil prices and sustained cooling of US economic data would most likely continue to keep the Canadian Dollar underpinned, exerting pressure on the pair. Moreover, if the Federal Reserve continues to stick to its dovish stance and US fiscal worries remain, the bearish scenario could deepen, keeping USD/CAD susceptible to more losses during upcoming sessions.

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Currencies

Bank of Canada Takes a Pause, But Imminent Trade Risks Hint at More Cuts to Come

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  • April 17, 2025
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The Canadian Dollar advanced after the Bank of Canada (BoC) surprised the market by taking a pause from its rate-cutting cycle, keeping interest rates steady for the first time since it began easing last June. Although the move gave the CAD short-term relief, the BoC’s Monetary Policy Report emphasized continued trade tensions and economic uncertainties, hinting that the pause might be temporary. The central bank presented two scenarios: a mild slowdown if tariffs are relaxed, or a deep recession if trade disputes intensify. With rate cuts already partly reflected in markets, analysts expect further easing to come — perhaps as soon as June — once the direction of U.S. trade policy becomes clearer. KEY LOOKOUTS • The Bank of Canada’s hold on rates surprised some market expectations, providing near-term support to the Canadian Dollar, but the pause is widely regarded as temporary. • BoC policy perspective is extremely reactive to changing trade tensions, particularly U.S. tariff actions, which will significantly impact rate direction going forward. • Scenario 1 is premised on a smooth resolution of trade tensions with a transient dip in inflation, whereas Scenario 2 is predicting a deeper worldwide slowdown and Canadian recession should an all-out trade war materialize. •  The OIS market already has 50bps of rate cuts priced in, anticipating a softer economic landing, but a further rise in trade risks may provoke even lower cuts. The Bank of Canada’s pause in cutting interest rates has provided the Canadian Dollar with some short-term relief, but deeper-seated economic risks imply the respite is likely to be short-lived. The central bank identified two potential scenarios for the economy: one in which trade tensions gradually fade, enabling inflation to anchor around the 2% target, and another in which a protracted trade war unleashes a sharp slowdown and Canadian recession. Markets already expect additional cuts, perhaps as early as June, based on how U.S. trade policy develops over the next few months. Since the BoC is holding back, global trade direction will probably determine its next policy action. The Bank of Canada kept rates unchanged, providing a short-term lift to the Canadian Dollar. But with continued trade risks and economic uncertainty, rate cuts are likely to resume soon, with markets looking to June for the next likely move. The BoC’s outlook continues to be highly sensitive to U.S. trade policy evolution. •  The Bank of Canada (BoC) left interest rates unchanged, surprising the markets in its first rate pause since the rate easing cycle kicked off in June last year. •  The Canadian Dollar (CAD) picked up, growing 0.7% relative to the U.S. Dollar after the rate hold. •   The BoC identified prominent trade-related concerns and worldwide uncertainties in its Monetary Policy Report. •  Two scenarios were presented: one with trade tensions softening, and the other with a prolonged trade war that results in a Canadian recession. •   Inflation would fall to 1.5% in the less severe scenario but would temporarily rise to 3.0% if trade tensions intensify. •  The market is already discounting 50 basis points of rate cuts, potentially beginning as soon as June. • Governor Macklem indicated the BoC stands poised to act “decisively” should the situation deteriorate, hinting that the suspension might prove transitory. The Bank of Canada has opted to leave interest rates unchanged, exercising prudence as it observes how trade tensions abroad will pan out. The break is providing the central bank with extra time to evaluate the risks confronting the Canadian economy, particularly with lingering uncertainty regarding U.S. trade policy. The move reflects that although the bank is in no hurry to further cut rates, it is still worried about what’s ahead. EUR/USD DAILY PRICE CHART CHART SOURCE: TradingView With the rate decision, the Bank of Canada also released two potential future scenarios for the economy. One would prefer a resolution to trade tensions in peace, which would see the economy gradually slow down before resuming stable expansion. The other is that the economy could experience a deeper downturn if trade tensions persist, which might trigger a recession. The signal is unmistakable: while the bank has stopped short for the time being, it stands ready to act if necessary to backstop the economy. TECHNICAL ANALYSIS USD/CAD pierced below crucial levels of support after the Bank of Canada left rates unchanged, reaffirming bearish pressure in the near term. The pair fell below its 50-day moving average, indicating a change in sentiment against the Canadian Dollar. Momentum oscillators such as the Relative Strength Index (RSI) are also trending lower, indicating possibility of more downside if the pair cannot regain traction above 1.3700. Traders will be monitoring closely for a firm break beneath the 1.3600 area, which could pave the way for more severe declines, particularly should economic news or trade events enhance the CAD’s prospects in coming weeks. FORECAST If tensions in global trade relax and Canadian economic data begin to stabilize, the Canadian Dollar might be able to sustain its strength in the short term. Softening or abolition of U.S. tariffs would also boost market sentiment, enabling USD/CAD to bounce back above major resistance points like 1.3700. And if growth or inflation surprises to the upper side, the Bank of Canada might postpone further rate cuts, providing a further boost to the CAD. On the negative side, if trade tensions intensify or U.S. tariffs rise, the Canadian economy may experience a more severe slowdown, prompting the Bank of Canada to lower rates earlier and more forcefully than anticipated. This would tend to weaken the CAD, sending USD/CAD higher towards resistance levels. A more precipitous decline in global growth or weak domestic data would put further pressure on the currency, creating space for a move above 1.3800.

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