The USD/CAD currency pair slipped further during Monday’s Asian session, dropping toward the 1.3700 level, as the Canadian Dollar (CAD) strengthened on the back of firm domestic data and rising oil prices. With the Bank of Canada (BoC) policy decision looming on Wednesday, market participants are increasingly pricing in a rate hold, especially after Q1 GDP figures are stronger than expected.
Meanwhile, external pressures such as US trade policy developments and global oil dynamics add further complexity to the FX landscape. The brokers at TelaraX provide a comprehensive breakdown of this topic in the article.
BoC Rate Hold Expectations Underpin CAD Strength
The Canadian Dollar (CAD) has emerged as a key gainer in early-week trading, with USD/CAD extending losses into a second consecutive session. The primary driver of this appreciation stems from Friday’s upbeat Canadian Gross Domestic Product (GDP) report. Canada’s economy expanded by 2.2% (annualized) in Q1, significantly beating the 1.7% forecast.
The growth was largely supported by stronger exports and an increase in business inventories, with companies accelerating shipments and stockpiling in anticipation of possible US tariffs under a renewed protectionist agenda.
This economic resilience has led markets to scale back expectations for an imminent BoC rate cut. Currently, traders assign a high probability that the central bank will keep the overnight rate steady at 5.00% during its upcoming June 5th policy meeting. A pause would mark continuity in the BoC’s cautious stance amid global uncertainties and inflation persistence.
Oil Market Dynamics Support the Loonie
The Canadian Dollar’s close correlation with crude oil prices remains intact, and recent developments in the energy market are reinforcing CAD’s bullish tone. West Texas Intermediate (WTI) crude has climbed toward $62.00 per barrel, aided by a combination of global demand optimism and controlled supply expansion from key producers.
In a key move, the OPEC+ alliance, comprising the Organization of the Petroleum Exporting Countries and its allies, announced a measured increase in output by 411,000 barrels per day (bpd) for July. This marks the third consecutive month of the same increment, signaling the group’s commitment to a gradual normalization rather than flooding the market with excess supply.
The modest pace of increases helped alleviate fears of oversupply and lent stability to oil prices.
US Dollar Softens Despite Supportive DXY Readings
Despite relative firmness in the US Dollar Index (DXY), which hovers around 99.30, the greenback has shown vulnerability against the Loonie. Broader USD performance remains mixed, with markets awaiting key US macroeconomic releases, particularly the ISM Manufacturing PMI for May, due later Monday.
The US economy is navigating a challenging landscape marked by stickier-than-expected inflation and uncertain growth momentum.
The Federal Reserve’s path forward remains clouded, with markets pricing in rate cuts only in the latter part of 2025, depending on inflation data and broader global conditions. This hesitation is feeding into lower US yields and capping USD upside.
Tariffs Threats Resurface as a Wildcard
Adding a fresh layer of risk to the US outlook, the President has reignited trade tensions with a pledge to double existing import tariffs on steel if reelected. At a rally in Pennsylvania, the US President declared plans to raise steel tariffs from 25% to 50%, a move aimed at securing the domestic industry but which could have significant global repercussions.
This escalation has the potential to stoke trade frictions, particularly with major steel exporters such as China, Canada, and the EU. For USD/CAD, the implications are twofold: on one hand, increased tariffs on Canadian steel could hurt exports, while on the other, such rhetoric may fuel safe-haven flows or generate policy responses that affect FX dynamics.
Outlook for USD/CAD
Technically, USD/CAD is now approaching key support levels near 1.3700, a zone last tested in mid-May. A clean break below this level could open the door to further downside toward 1.3650, especially if the BoC maintains its rate and offers a neutral-to-hawkish tone on Wednesday.
On the upside, resistance is now seen near 1.3760, followed by the psychologically important 1.3800 level. However, unless US data materially surprises to the upside or geopolitical shocks shift risk sentiment, USD/CAD may remain under bearish pressure in the near term.
Conclusion
The USD/CAD pair is under pressure as strong Canadian economic data and rising oil prices combine to boost the Loonie, while expectations of a BoC rate hold reinforce the bullish CAD narrative.
Meanwhile, looming US macro prints and renewed protectionist rhetoric from the US President’s campaign trail add further complexity to the pair’s outlook. All eyes now turn to the Bank of Canada’s rate decision midweek, which could define the trajectory of USD/CAD for the weeks ahead.
