USD/CAD Price Forecast: Softens below 1.4000 as overbought conditions spur pause in broader uptrend

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The USD/CAD pair trades in negative territory around 1.3975 during the early European trading hours on Monday. The US Dollar (USD) strengthens against the Canadian Dollar (CAD) after the US and Iran announce a peace deal to reopen the Strait of Hormuz.

USD/CAD loses ground to near 1.3975 in Monday’s early European session.
The pair holds bullish near-term bias, but a temporary sell-off cannot be ruled out amid overbought RSI momentum.
The first upside barrier emerges at 1.4025; the initial downside target to watch is 1.3931.

US President Donald Trump on Sunday announced a “great deal” to end the war with Iran. Iran’s National Security Council stated that the US naval blockade will be lifted immediately and the war will end on all fronts, including Lebanon. Pakistan’s Prime Minister Shehbaz Sharif said that the official signing ceremony for the “peace deal” will take place on Friday in Switzerland.

The US Federal Reserve (Fed) interest rate decision will be the highlight later on Wednesday. The Fed is expected to leave its benchmark interest rate unchanged at a target range of 3.50% to 3.75%. Markets are now pricing in nearly a 64% odds of a US central bank interest rate hike in December this year after the peace deal, down from 69% last week, according to the CME FedWatch tool.

Technical Analysis:

In the daily chart, USD/CAD maintains a bullish near-term bias as spot holds well above the 100-day simple moving average (SMA) and the Bollinger middle band, suggesting a firm underlying bid despite stretched conditions. The Bollinger upper band near caps the immediate topside, while the Relative Strength Index (14) hovering above 70 hints at overbought momentum and the risk of a corrective pause rather than a clean continuation higher.

On the topside, immediate resistance emerges at the Bollinger upper band around 1.4025, and a sustained break above this ceiling would open the door to the high of October 16 of 1.4060. The next hurdle is seen at 1.4100 psychological level. On the downside, initial support is located at the June 11 low of 1.3931, followed the Bollinger middle band near 1.3865. The next contention level to watch is the 100-day SMA at 1.3732 and the lower Bollinger band around 1.3708, where buyers would be expected to reappear on a deeper pullback.

(The technical analysis of this story was written with the help of an AI tool.)

Canadian Dollar FAQs

What key factors drive the Canadian Dollar?

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.

How do the decisions of the Bank of Canada impact 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.

How does the price of Oil impact the Canadian Dollar?

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.

How does inflation data impact the value of the Canadian Dollar?

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.

How does economic data influence the value of 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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