USD/CAD climbed from near 1.3500 to its highest level in more than a week during Tuesday’s Asian session. It traded just below the mid-1.3600s as markets waited for Canada’s latest inflation data.
Canada’s headline CPI is expected to stay at 2.4% year over year in January, which is still above the Bank of Canada’s target. The result could shift expectations for the BoC’s next move and drive the Canadian dollar in the near term.
Canadian Inflation In Focus
Lower crude oil prices pressured the commodity-linked Canadian dollar, while the US dollar held modest gains. Even so, USD/CAD gains were capped by expectations that the Federal Reserve may turn more dovish.
After softer US inflation data on Friday, markets increased bets on a Fed rate cut in June. Pricing also suggests at least two 25-basis-point cuts in 2026, along with worries about the Fed’s independence.
Focus now shifts to the FOMC minutes on Wednesday and the US PCE Price Index on Friday. The BoC’s core CPI measure excludes eight volatile items: fruits, vegetables, gasoline, fuel oil, natural gas, mortgage interest, intercity transportation, and tobacco products.
USD/CAD is pushing toward the mid-1.3600s after bouncing from 1.3500 last week. Traders are now pausing ahead of the key Canadian inflation report, which is likely to be the main short-term driver for the loonie.
Markets are watching the Canadian CPI closely, with expectations that it will hold at 2.4% in January. In late 2025, inflation remained sticky and stayed above the Bank of Canada’s 2% target. A reading above 2.4% would likely support the Canadian dollar, as it could keep the BoC on hold. A weaker reading would likely weigh on the loonie.
Trading Strategies Around Key Data
On the US side, the dollar has found some support, but sentiment remains cautious because the Fed is seen as dovish. Fed funds futures now imply more than a 70% chance of a rate cut by the June 2026 meeting. This fits a pattern seen in 2025, when shifting rate-cut expectations were a major driver of the greenback.
Falling oil prices are also weighing on the loonie. WTI crude has recently slipped below $75 a barrel, down from highs above $80 at the start of the year. That drop is a headwind for the Canadian dollar and supports a higher USD/CAD, making it harder for bulls on the loonie.
In the near term, traders may look for strategies that can benefit from a volatility spike around the Canadian CPI release. One approach is buying USD/CAD option straddles, which can profit from a large move in either direction. This can help trade the event without taking a clear directional view.
Over the next few weeks, the key theme may be a split between a neutral Bank of Canada and a dovish Fed. If this week’s US PCE data comes in soft, it would strengthen the rate-cut narrative. In that case, selling out-of-the-money USD/CAD call options could be one way to position for limited upside in the pair.
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