USDCAD Update Can the Canadian dollar recover?

Over the last few trading sessions, the weakness of the Canadian dollar against the US dollar has become increasingly evident. This can be seen in short-term USD/CAD price action, with the pair now posting eight consecutive bullish sessions in favor of the US dollar. Over this period, USD/CAD has gained more than 1.6%.

For now, buying pressure remains supported by the possibility of a more aggressive Federal Reserve in the United States, which continues to support the US dollar. If this dynamic remains in place in the short term, USD/CAD could continue to reflect important upside pressure over the coming trading sessions.

Fed continues to dominate

One of the most relevant events of the week was the Federal Reserve decision. Although the central bank decided to keep interest rates unchanged at the 3.75% reference level, it also highlighted the continued importance of inflation pressures in the US economy. This points to the possibility of a more aggressive Fed over the coming months, in contrast with the Bank of Canada, which so far maintains a more stable outlook and an interest rate near 2.25%.

After the Federal Reserve decision, the probability table for the central bank’s next moves changed significantly in the short term. For the September 16 meeting, markets now show a probability above 51% that the Fed could raise interest rates toward a new level near 4.00%.

The key point is that just a few weeks ago, markets expected a possible rate hike to occur closer to the final months of 2026. Now, the outlook suggests that a more aggressive Federal Reserve could arrive much earlier than financial markets had anticipated.

Source: CMEGROUP

This event has been key for the strength of the US dollar. Expectations of a more aggressive Fed and potentially higher interest rates can make dollar-denominated assets more attractive than investments denominated in Canadian dollars. This is happening in an environment where the Bank of Canada maintains a lower rate and, for now, there is no clear expectation that the differential with the United States will begin to narrow.

This dynamic may be keeping demand for the US dollar on firm ground in the short term. This is already visible in the behavior of DXY, which has shown a strong recovery with an upward slope and movements above the 100-point reference area. Since the Fed decision, the US dollar has incorporated a relevant strength bias in the short term.

Source: TradingEconomics

One of the most important catalysts behind USD/CAD movements remains the outlook for a more aggressive Federal Reserve. So far, this scenario has allowed the US dollar to maintain its strength and has made it difficult for the Canadian dollar to recover consistently. For this reason, buying pressure could remain relevant in USD/CAD over the coming sessions.

 

Could Canada’s CPI change the outlook?

At the beginning of next week, Canada’s average annual CPI for May is expected to be released. For now, the figure is expected to come in near 2.9%, slightly above the 2.8% seen in April. This would begin to show that a mild acceleration in inflation may still be present in Canada, although not too far above what has been seen in previous months.

Source: TradingEconomics

This release could be important because inflation remains one of the main factors for evaluating possible changes in the Bank of Canada’s stance. If the figure comes in well above the expected 2.9% and moves further away from the 2.00% target, markets could begin to question the idea of a central bank on hold.

In that scenario, expectations of a more restrictive Bank of Canada could increase, which may help the Canadian dollar regain some strength in the short term. For USD/CAD, this could translate into a phase of greater indecision, especially if markets start adjusting their expectations for Canadian interest rates over the coming sessions.

 

Technical outlook for USD/CAD

Source: StoneX, Tradingview

• Aggressive trendline emerges: After the important loss of strength in the Canadian dollar over the last few weeks, an aggressive bullish trendline has started to emerge on the chart since the first days of May. For now, it remains the dominant short-term pattern in average USD/CAD movements. If buying pressure manages to hold and continues to mark new relevant highs, this new trendline could keep extending over the coming sessions.
   
• RSI: Although RSI remains consistently above the 50 level, showing that average bullish impulses continue to dominate in the short term, the indicator is also near the overbought area marked by the 70 level. This suggests that there could be a recent excess in buying strength, which may open space for possible bearish corrections over the coming trading sessions.
   
• MACD: The MACD indicator shows a relevant histogram, with consistent movements above the neutral 0 level. This suggests that the average strength of short-term moving averages maintains an important buying bias. For now, this remains the dominant technical scenario on the chart in the short term and could continue to be relevant over the coming sessions.
   

Key levels:

• 1.42604 – Relevant resistance: Important high level that has not been seen consistently since April 2025 and currently represents the most important upside barrier in the short term. Price movements toward this level would reinforce the relevance of the current buying bias and could continue to support an extension of the bullish trendline over the coming sessions.
   
• 1.41113 – Near-term barrier: Neutral zone that coincides with highs from previous months and stands as a tentative barrier if short-term bearish corrections begin to form in USD/CAD.
   
• 1.39322 – Crucial support: Level that corresponds to a previous high within a relevant sideways range in the pair and now also coincides with the bullish trendline. Strong movements below this level could put the current bullish market structure at risk and open the door to a more dominant selling bias over the following weeks.
   

Written by Julian Pineda, CFA, CMT – Market Analyst

Follow him on: @julianpineda25