The Canadian Dollar (CAD) has lost ground against the US Dollar (USD), as the USD/CAD exchange rate climbed to around 1.3755 in early European trading on Friday.
This movement positions the pair for its largest weekly gain in over two months, driven by a combination of geopolitical developments, inflationary pressures, and central bank expectations. The brokers at Alderstone Holdings break down this topic thoroughly in their informative article.
USD/CAD Strengthened on Safe-Haven Demand
The USD/CAD pair gathered momentum as investors sought safe-haven assets amid ongoing geopolitical tensions in the Middle East. The US Dollar benefited from elevated demand, while the Canadian Dollar remained pressured despite gains in energy prices, reflecting its sensitivity to commodity cycles.
Traders are monitoring the 1.3750–1.3760 range, which has acted as near-term resistance, while 1.3700 provides immediate technical support. The pair’s recent upward movement represents a 0.65% weekly increase, marking the largest gain since early March, and reflects the broader shift toward USD strength in global currency markets.
Geopolitical Developments and Trade Diplomacy
Investor focus remains on the second day of high-level US-China trade discussions, which address global trade stability and the reopening of key maritime routes in the Strait of Hormuz, disrupted due to ongoing regional conflicts.
While early progress in negotiations has provided some optimism, market sentiment remains cautious, reinforcing demand for USD as a risk-off currency. The combination of trade uncertainty and geopolitical risk continues to weigh on CAD performance, particularly given Canada’s exposure to energy exports and its economic linkages with the US.
US Inflation and Interest Rate Outlook
Recent US inflation data have exceeded market expectations. Headline CPI increased by 0.4% month-over-month, while core CPI, excluding food and energy, rose 0.3% month-over-month. On a year-over-year basis, headline CPI stands at 4.2%, and core CPI at 3.7%.
These readings have reinforced expectations for a Federal Reserve (Fed) interest rate hike in December. The CME FedWatch Tool shows that the chance of the Federal Reserve raising rates by 25 bps at the next meeting has jumped to 36.9%, compared with 22.5% last week. Market pricing now implies a median Fed funds rate of approximately 5.125% by year-end, reflecting a higher-for-longer monetary policy stance.
Rising energy costs, including crude oil and natural gas, have contributed to higher headline inflation, further supporting the case for sustained USD demand. As a result, the Canadian Dollar faces downward pressure despite favorable commodity fundamentals.
Bank of Canada Maintains Patient Policy
The Bank of Canada (BoC) has adopted a more cautious approach. Minutes from the recent policy meeting indicate that the Governing Council is prepared to remain patient, even in light of a headline inflation spike to 3.8% year-over-year, primarily driven by energy price shocks.
The BoC’s approach emphasizes incremental policy adjustments based on evolving economic data, rather than a predetermined path. This stance has constrained CAD strength, as market participants anticipate a lag in interest rate adjustments relative to the US Federal Reserve, providing additional support to the USD/CAD pair.
Technical and Market Outlook
From a technical perspective, USD/CAD has displayed resilience near 1.3755, with resistance levels emerging around 1.3770–1.3800. Support is currently observed near 1.3700, which may act as a short-term floor in the event of profit-taking or Canadian Dollar appreciation.
The pair’s Relative Strength Index (RSI) on the daily chart is approaching 65, signaling moderate bullish momentum without being overextended. Traders are also monitoring energy markets, with WTI crude oil trading near $83 per barrel and natural gas around $3.95 per MMBtu, as commodity volatility continues to influence CAD valuation.
Market participants remain attentive to macroeconomic indicators, including US retail sales, Canadian GDP data, and any updates from ongoing US-China trade discussions, all of which are expected to shape short-term USD/CAD movements. Sustained gains above 1.3755 could open the door for further USD strength, while a pullback below 1.3700 might provide a reprieve for the Canadian Dollar.
Conclusion
While rising energy prices offer support to the CAD, the stronger USD, driven by elevated interest rate expectations and safe-haven demand, continues to dominate market sentiment. Technical indicators suggest that USD/CAD may test resistance near 1.3770–1.3800, while support at 1.3700 remains a key level for short-term positioning.
The market is likely to remain sensitive to headline economic data, including inflation readings and central bank communications, with the USD/CAD pair serving as a barometer for both risk sentiment and interest rate differentials. Overall, the Canadian Dollar faces downward pressure in the near term, while the US Dollar retains a dominant position amid ongoing macro and geopolitical uncertainty.