Canadian Dollar gathers strength on easing Fed rate hike bets
- USD/CAD declines to near 1.3910 in Friday’s early European session.
- US producer prices were unchanged in July, below the consensus.
- Traders added to bets favoring no change in rates at the Fed's September meeting.
The USD/CAD pair attracts some sellers to around 1.3910 during the early European trading hours on Friday. The US Dollar (USD) weakens against the Canadian Dollar (CAD) as cooled US inflation data have tempered aggressive Federal Reserve (Fed) rate-hike bets. The US July Retail Sales report will be in the spotlight later on Friday.
The Fed is expected to leave interest rates unchanged in September after data on Thursday showed inflation cooled in July. The Bureau of Labor Statistics showed on Thursday that the US Producer Price Index (PPI) was unchanged in July, following a revised 0.1% decline in June. This figure came in below the market consensus of 0.2%.
Meanwhile, the core PPI, which excludes food and energy, increased 0.2% MoM in July, softer than a 0.3% gain expected. On an annual basis, the headline PPI climbed 4.7% YoY in July, while the core PPI rose 4.2% YoY during the same period.
Traders are now pricing a 38% odds of a rate hike next month, according to the CME FedWatch tool, and remain convinced the US central bank will need to raise rates by the end of 2026 to bring down inflation that has been running above the 2% target for more than five years.
New York Fed President John C. Williams said that he expects inflation to continue to ease as the effects of last year's tariff increases and the Middle East war abate, allowing the central bank to keep its policy rate unchanged.
Ongoing tensions in the Middle East and uncertainty surrounding reopening the Strait of Hormuz could boost crude oil prices and underpin the commodity-linked Loonie. It is worth noting that Canada is a major oil-exporting country, and high crude oil prices generally have a positive impact on the CAD.
Loonie seen finding support as Fed stays sidelined
Strategists at National Bank of Canada suggest that the Canadian Dollar’s recent softness may begin to fade, arguing that, “aided by a sidelined Fed, the underwhelming loonie may finally find its footing.” They point to their latest Forex analysis as reinforcing the view that a steady Fed backdrop could prove increasingly supportive for the Loonie over the coming quarters.
Goolsbee’s softer inflation tone nudges Dollar expectations but keeps Fed bias hawkish
Fed’s Goolsbee delivers a moderately cautious tone, with the FXS Speechtracker score at 4.6/10, notably weaker relative to the historical average of 6.8/10. The emphasis on “a little bit better” inflation readings and the hope that tariff and oil shocks prove one-off suggests growing confidence that price pressures are easing, yet still framed as conditional and data-dependent. The remark that the US economy is “steady” reinforces a narrative of gradual progress toward the 2% target rather than a decisive dovish pivot.
The FXS Fed Sentiment Index fell by 2.36 points to 134.61, signaling a modest pullback in perceived hawkishness following the interview. Despite the decline, the index remains firmly above the 100 neutral line, indicating that Fed policy is still viewed as hawkish overall, even as Goolsbee’s softer tone trims the edge of that stance.
Technical Analysis: USD/CAD
In the daily chart, USD/CAD maintains a bearish near-term bias as it holds beneath the 100-day moving average (MA) and the Bollinger Bands’ 20-period middle band. Price is slipping toward the lower Bollinger band support, while the Relative Strength Index (14) at 31.96 hovers just above oversold territory, hinting that downside momentum remains in control but could be nearing exhaustion.
On the topside, immediate resistance is seen at the 100-day MA at 1.3920, followed by the Bollinger middle band at 1.4025, with the upper band around 1.4162 acting as a stronger cap if a corrective bounce extends. On the downside, the lower Bollinger band at 1.3885 is the first notable support zone, and a sustained break below this level would reinforce the prevailing bearish structure on the daily timeframe.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
Canadian Dollar FAQs
The key factors driving the Canadian Dollar (CAD) are the level of interest rates set by the Bank of Canada (BoC), the price of Oil, Canada’s largest export, the health of its economy, inflation and the Trade Balance, which is the difference between the value of Canada’s exports versus its imports. Other factors include market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – with risk-on being CAD-positive. As its largest trading partner, the health of the US economy is also a key factor influencing the Canadian Dollar.
The Bank of Canada (BoC) has a significant influence on the Canadian Dollar by setting the level of interest rates that banks can lend to one another. This influences the level of interest rates for everyone. The main goal of the BoC is to maintain inflation at 1-3% by adjusting interest rates up or down. Relatively higher interest rates tend to be positive for the CAD. The Bank of Canada can also use quantitative easing and tightening to influence credit conditions, with the former CAD-negative and the latter CAD-positive.
The price of Oil is a key factor impacting the value of the Canadian Dollar. Petroleum is Canada’s biggest export, so Oil price tends to have an immediate impact on the CAD value. Generally, if Oil price rises CAD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Oil falls. Higher Oil prices also tend to result in a greater likelihood of a positive Trade Balance, which is also supportive of the CAD.
While inflation had always traditionally been thought of as a negative factor for a currency since it lowers the value of money, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Higher inflation tends to lead central banks to put up interest rates which attracts more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in Canada’s case is the Canadian Dollar.
Macroeconomic data releases gauge the health of the economy and can have an impact on the Canadian Dollar. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the CAD. A strong economy is good for the Canadian Dollar. Not only does it attract more foreign investment but it may encourage the Bank of Canada to put up interest rates, leading to a stronger currency. If economic data is weak, however, the CAD is likely to fall.
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