The USD/CAD pair attracted selling interest during Friday's Asian trading session, falling back to near the 1.4070 level, marking a daily decline of about 0.10%. Despite this dip, the exchange rate remains above the previous day's low and is on track to end a three-week losing streak. The market is currently weighing the impact of a weak US dollar, volatile crude oil prices, and diverging monetary policies between the US and Canada on the currency pair's direction.
Recent international oil prices have retreated from their highs since June 11, primarily due to profit-taking by investors. Given the strong correlation between the Canadian economy, the loonie, and the energy market, a rise in oil prices typically supports the Canadian dollar, while the recent price adjustment has eroded some of the buying pressure for the CAD.
Meanwhile, the divergence in policy expectations between the Federal Reserve and the Bank of Canada is a key factor influencing the USD/CAD trend. Weak Canadian consumer inflation data has further strengthened market expectations that the Bank of Canada will maintain its current interest rate. There is a broad market consensus that the likelihood of the Bank of Canada keeping its policy rate unchanged for the remainder of 2026 has increased.
In contrast, the US market is reassessing the future policy path of the Federal Reserve. As rising energy prices may reignite inflationary pressures, investors have increased their expectations for a Fed rate hike. Market pricing suggests that energy-driven inflation risk could become a significant variable affecting US interest rate policy, providing support for the US dollar.
Furthermore, ongoing tensions in the Middle East are limiting the downside for the US dollar. As a major safe-haven currency, the greenback typically attracts capital inflows during periods of heightened risk events. If regional conflicts escalate further, increasing the risk to crude oil supply, it could simultaneously boost energy prices and safe-haven demand, creating a two-way impact on USD/CAD.
Trade concerns are also influencing market risk appetite. The US government plans to implement new tariff measures against approximately 60 major trading partners, covering a wide range of imported goods. These policies increase global economic uncertainty, prompting investors to reduce allocations to risk assets and providing some support for the US dollar.
Currently, the market has not confirmed that the recent rebound of USD/CAD from its one-month low is over. Investors still need to observe whether the selling pressure on the US dollar will persist and whether the crude oil market can regain upward momentum. Market focus is turning to the US S&P Global Purchasing Managers' Index (PMI) preliminary data, which could influence the short-term direction of the US dollar. Additionally, developments in the Middle East will continue to affect international oil prices and, in turn, the performance of the Canadian dollar. Subsequently, the market will focus on the Federal Reserve's two-day monetary policy meeting, where policy signals may determine the next trend for USD/CAD. From a daily chart perspective, USD/CAD recently found support near 1.4000 and rebounded, but it remains in an adjustment phase of its previous downtrend. The price is currently trading around 1.4070, with resistance to the upside in the 1.4120 to 1.4150 area. A break above this zone could see a test of resistance near 1.4200. Initial support to the downside is at the 1.4040 area, followed by the psychological level of 1.4000. A break below could open the door for further downside. On the 4-hour chart, USD/CAD is in a short-term consolidation and adjustment phase, trading around the 1.4070 level. The MACD indicator shows weakening bearish momentum, while the RSI indicator remains in neutral territory, indicating that the market has not yet formed a clear direction. If the pair breaks and holds above 1.4120, the short-term rebound could extend. However, a break below 1.4040 support could lead to a retest of recent lows.