The USD/CAD currency pair extended its bullish momentum to test 1.3850 on Monday, driven by growing expectations of monetary policy easing from both the Federal Reserve (Fed) and the Bank of Canada (BoC).
The pair has recovered recent losses as the US Dollar (USD) gained traction, reflecting investor focus on macro-economic indicators, central bank policy shifts, and labor market trends across North America. This article by BluSkyMint’s Nate McKenzie presents a complete and accessible breakdown of the topic.
During Asian trading hours, USD/CAD hovered around 1.3840, marking the sixth consecutive session of gains. This extended rally is underpinned by contrasting economic signals: slowing US employment growth versus disappointing Canadian labor market data, fueling speculation of potential rate cuts by both the Fed and the BoC.
Traders are increasingly positioning for volatility in USD/CAD, as central bank expectations and interest rate differentials remain critical drivers for short-term movements.
US Dollar Strength Amid Slower Job Growth
The US labor market showed signs of slowing in August, according to the latest report from the Bureau of Labor Statistics (BLS). Nonfarm Payrolls (NFP) rose by just 22,000, falling well short of the anticipated 75,000. July’s employment increase was adjusted upward to 79,000.
Meanwhile, the unemployment rate edged up to 4.3%, matching expectations and highlighting a moderation in employment growth that is dampening investor confidence.
The weaker-than-expected US employment data has prompted a reassessment of Federal Reserve monetary policy. The CME FedWatch tool shows that the probability of the Federal Reserve implementing a 25-basis-point rate cut in September has climbed to 92%, compared with 86% a week earlier.
Investors are also considering the possibility of a larger 50 bps reduction. This shift highlights growing market expectations for monetary easing amid signs of a slowing US economy, particularly following the weaker-than-expected August nonfarm payrolls (NFP) report and softer wage growth.
Canadian Dollar Under Pressure
On the Canadian side, the CAD came under pressure after the release of disappointing labor market data. In August, the Net Change in Employment recorded a decline of 65.5K jobs, far below expectations of 7.5K new jobs.
This follows July’s loss of 40.8K positions, marking two consecutive months of negative employment growth. Meanwhile, the Unemployment Rate jumped to 7.1%, surpassing the expected 7.0% and up from 6.9% previously.
The weak Canadian labor market has intensified speculation that the Bank of Canada (BoC) may ease policy in the near term. Investors are pricing in potential rate cuts, reflecting concerns that employment weakness could translate into slower consumer spending and weaker GDP growth.
As a result, the Canadian Dollar has come under pressure, supporting the USD/CAD uptrend.
Technical Analysis of USD/CAD
Technically, USD/CAD remains in a strong upward trend, with support levels around 1.3770 and resistance near 1.3850–1.3860. The pair has benefited from positive momentum indicators, including the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD), which show continued bullish signals.
However, the pair may experience short-term pullbacks due to policy-driven volatility and potential profit-taking.
Traders should monitor CME FedWatch probabilities, BoC statements, and upcoming economic releases, including inflation, retail sales, and employment data. These events are likely to influence USD/CAD positioning, as market participants respond to shifts in central bank expectations.
Interest rate differentials between the US and Canada will remain a key factor driving short-term volatility.
Near-Term Outlook
In the near term, USD/CAD is likely to remain bullish, supported by weak Canadian employment figures and speculation of BoC easing, alongside the USD’s resilience despite potential Fed rate cuts. However, the pair’s upside may be capped if market expectations for US rate cuts accelerate, as additional easing could weigh on the USD.
Traders should remain alert to economic data releases, including US inflation, Canadian GDP, and retail sales, as these will provide further insights into monetary policy trajectories. Technical resistance levels near 1.3850–1.3860 may present short-term barriers, but a break above this range could open the way for further gains toward 1.3900.
Conclusion
The ongoing USD/CAD rally reflects a complex interplay of labor market developments, central bank expectations, and investor positioning. As the Fed and BoC weigh potential rate cuts, the pair remains sensitive to macroeconomic data, interest rate differentials, and technical levels.
With CME FedWatch probabilities pointing to a high chance of Fed easing and Canadian jobs data indicating policy pressure on the BoC, USD/CAD is positioned for continued volatility and bullish momentum in the short term. Traders should monitor central bank communications and economic releases closely to navigate this dynamic forex landscape.
