CAD Strengthens as Diverging BoC–Fed Paths Drive Three-Week USD/CAD Slide

Summary:

The Canadian Dollar strengthened to its strongest levels in nearly three months as diverging policy signals from the Bank of Canada and the Federal Reserve drove investors toward the loonie.

SELL USDCAD

Close Time

CLOSED

1.37600

Entry Price

1.36000

1.38700

1.35793 -0.00055 -0.04%

15.8

Pips

Profit

1.36000

1.37442

Exit Price

1.37600

Entry Price

1.38700

The Canadian Dollar held firm against the US Dollar on Friday, extending a multi-week advance as investors continued to reassess the evolving monetary policy landscape between the Bank of Canada (BoC) and the Federal Reserve. The USD/CAD pair traded near 1.3760 during the European session — its weakest level since mid-September — and is on track to log its third consecutive weekly decline, pressured by widespread softness in the US Dollar following the Fed’s latest rate decision.

The loonie’s outperformance this week reflects a growing conviction that Canada’s policy stance is likely to remain comparatively steady well into 2026, even as the Federal Reserve begins to cautiously unwind restrictive settings. With volatility in global FX markets tied closely to central-bank divergence, traders have been quick to rotate out of the greenback and into currencies such as the CAD that offer policy stability and resilient macro fundamentals.

The BoC opted to maintain its benchmark policy rate at 2.25%, meeting market expectations and signalling that current settings are “about the right level” given inflation’s proximity to the 2% target and continued resilience in domestic economic activity. While the decision itself was widely anticipated, investors honed in on the tone of the accompanying statement, which leaned less dovish than some had predicted.

Policymakers highlighted stable demand, a tightening labour market relative to earlier in the year, and improving business sentiment—factors that collectively support the view that Canada’s economy has avoided the deeper slowdown feared during the summer.

Major domestic banks echoed this sentiment. Analysts at National Bank of Canada (NBC) wrote that they expect the BoC to hold steady through at least the first half of 2025, pushing out the expected timing of rate increases to the fourth quarter of 2026. This marks a notable shift from previous projections, which had anticipated the next tightening cycle to begin in early 2027.

NBC noted that falling unemployment coupled with persistent inflationary pressure could bring forward the timing of rate hikes. However, they warned that downside risks remain, particularly if labour-market conditions weaken or if renewed trade uncertainty arises from the 2026 review of the US-Mexico-Canada Agreement (USMCA).

Markets are now laser-focused on next Monday’s Consumer Price Index (CPI) report. A hotter-than-expected print could increase speculation that the BoC may turn incrementally hawkish in 2025, while a softer reading would reinforce the narrative of prolonged stability.

In contrast, the Federal Reserve lowered interest rates by 25 basis points this week, bringing the target range for the federal funds rate to 3.50%–3.75%. Policymakers acknowledged that both sides of their dual mandate — inflation and employment — remain delicately balanced, arguing that incoming data will determine the pace of future easing.

While the decision aligned with market forecasts, the tone from officials was less hawkish than markets had anticipated, helping push the US Dollar lower across the board.

Chicago Fed President Austan Goolsbee, who dissented against the cut, argued that policymakers should have waited for more clarity on inflation before easing further. Although he remains optimistic that rates are likely to fall meaningfully over the next year, he warned against front-loading reductions given the inflation volatility experienced over the past several years. Goolsbee highlighted that most economic indicators — including job creation and wage growth — point to moderate cooling rather than a sharp downturn.

The divergence between a steady BoC and a Fed easing cycle remains one of the primary catalysts behind the downward momentum in USD/CAD.

Technical Analysis

USD/CAD continued its sharp slide during Friday’s intraday session, testing the 1.3755 support zone — a level previously identified as a critical bearish target. This decline coincides with increasingly negative signals across momentum indicators. Despite dipping into oversold territory on the Relative Strength Index (RSI), selling pressure remains intact, though the oversold condition may trigger intermittent corrective rebounds.

The broader technical structure continues to favour the bears. Price action remains comfortably below the 50-day Exponential Moving Average (EMA50), reinforcing the presence of sustained downside momentum. A well-defined descending trend line also provides additional resistance overhead, reducing the probability of a meaningful recovery in the near term.

Should bears maintain control, a clean break below 1.3750 could expose the next support zone near 1.3600. Conversely, any temporary bullish corrections are expected to remain capped unless the pair climbs back above 1.3840 — an area that currently aligns with dynamic resistance tied to the EMA50.

TRADE RECOMMENDATION

SELL USDCAD

ENTRY PRICE: 1.3760

STOP LOSS: 1.3870

TAKE PROFIT: 1.3600

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