The Canadian dollar firmed against the US dollar on Wednesday after the latest US Consumer Price Index (CPI) report, with USD/CAD near 1.3925 after reaching a six-month high of 1.3969 on Tuesday. US inflation rose for a third month in May: headline CPI was 4.2% year on year while core CPI edged up to 2.9%, both broadly in line with expectations, and monthly core CPI slowed to 0.2% from 0.4%. The release did not add fresh momentum to the greenback, while geopolitical tension persisted after the US and Iran exchanged military strikes on Tuesday and President Donald Trump commented on Truth Social.
Markets were positioning for the Bank of Canada (BoC) rate decision at 13:45 GMT, with the policy rate expected to remain at 2.25% for a fifth straight meeting. Attention was on forward guidance for any indication of tighter policy ahead. Technically, USD/CAD remained above key moving averages, with the Relative Strength Index (RSI) just under 69 and the Average Directional Index above 30. Support levels were cited at the 200-day SMA near 1.3816, then the 50-day SMA at 1.3765 and the 100-day SMA at 1.3724.
Focus On BoC Guidance And USD/CAD Levels
We see the US Dollar’s strength pushing the pair near six-month highs, and we should be cautious ahead of the Bank of Canada’s (BoC) rate decision. The immediate focus is on the BoC’s forward guidance, as a hawkish signal could temporarily strengthen the Canadian dollar. This could provide a better entry point for long USD/CAD positions.
With US inflation at 4.2%, we note this remains more than double the Federal Reserve’s 2% target, likely keeping their policy restrictive and supporting the dollar. Historically, such divergence between high US inflation and a more moderate Canadian economy tends to favor a stronger USD. This fundamental backdrop reinforces the bullish trend seen on the charts.
Safe-Haven Flows, Trading Strategy, And Key Technicals
The tensions in the Middle East are fueling safe-haven demand for the US dollar. While this situation can also push oil prices higher, which typically helps the loonie, the dollar’s safe-haven status is currently the more powerful force in the market. We’ve seen this pattern before, where global uncertainty makes the US dollar the default asset for traders.
Given the potential for a pullback and an overbought RSI reading near 69, we see an opportunity in using options to position for further upside. Selling out-of-the-money puts with a strike price near the 1.3800 support level could be a viable strategy to collect premium. Current one-month implied volatility is sitting around 7.5%, making option premiums attractive for this type of trade.
We will be watching the Bank of Canada’s forward guidance very closely for a potential entry point. A surprisingly hawkish tone could trigger a dip towards the 200-day moving average near 1.3816, which we view as a key area to initiate new long positions. If the central bank’s guidance remains dovish, the uptrend will likely resume without a significant pullback.
