Canadian Dollar strengthens modestly against US Dollar ahead of Fed decision
- The Canadian Dollar gains modestly as surging Oil prices offer support.
- A stronger US Dollar and diverging Fed-BoC expectations limit the Loonie’s upside.
- USD/CAD consolidates below the 21-day SMA as traders await the Fed decision.
The Canadian Dollar (CAD) modestly outperforms the US Dollar (USD) on Wednesday, drawing support from a rebound in Oil prices as the war in the Middle East intensifies again following a brief calm. At the time of writing, USD/CAD trades around 1.4093, trapped within a week-old range.
US President Donald Trump threatened heavy military action against Iran on Wednesday following attacks on US targets in Jordan.
West Texas Intermediate (WTI) trades around $83, up more than 5% on the day. Higher Oil prices typically support the Canadian Dollar due to Canada’s position as a major crude exporter.
However, elevated Oil prices provide only limited support to the Loonie as a broadly stronger US Dollar remains the main driver of the pair. The US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, trades around 101.45, rebounding from an intraday low of 101.24.
Diverging monetary policy expectations add another headwind for the Canadian currency, with traders seeing a greater chance of the Federal Reserve (Fed) raising interest rates than the Bank of Canada (BoC) in response to energy-driven inflation risks.
The Fed is widely expected to leave interest rates unchanged when it announces its policy decision at 18:00 GMT. Still, a rate hike cannot be ruled out, with the CME FedWatch Tool showing around a 31% probability of a 25-basis-point increase.
Technical analysis
On the daily chart, USD/CAD holds a modestly bullish near-term bias as it sits above the 50-day and 100-day Simple Moving Averages (SMAs) at roughly 1.4045 and 1.3893, respectively.
The pair is still capped by the 21-day SMA around 1.4123 overhead, suggesting a consolidative tone rather than a clean breakout, while the Relative Strength Index (RSI) hovers near a neutral 50 and the Moving Average Convergence Divergence (MACD) remains slightly negative but has been edging higher, hinting that downside momentum is fading.
On the topside, a sustained move above the 21-day SMA at 1.4123 would open the way for further gains, reinforcing the short-term bullish structure. On the downside, initial support is seen near the immediate price pivot around 1.4090/1.4094, followed by the 50-day SMA at 1.4045. A deeper pullback would look to the horizontal support zone near 1.4000, with the 100-day SMA at 1.3893 acting as a more distant structural floor.
(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.
