The Canadian Dollar (CAD) is gaining strength against the US Dollar (USD) after comments from Federal Reserve Governor Christopher Waller. The USD/CAD pair is currently trading above 1.3720, showing a slight drop of 0.20%. Waller indicated that the Federal Reserve might consider cutting the policy rate by 25 basis points. Recent employment data from the US private sector shows signs of slowing down, and inflation risks from tariffs may only be temporary.

Fed Rate Cut Expectations

Even with strong real estate market data from June, the outlook for more Fed rate cuts in September is affecting the USD/CAD exchange rate. Preliminary consumer sentiment data for July in the US increased to 61.8, while inflation expectations decreased for both the 1-year and 5-year forecasts. The resilience of the US economy suggests that interest rates might stay within the 4.25%-4.50% range for a while longer. However, political uncertainties and slow progress in trade talks could limit the strength of the US Dollar. The daily chart for USD/CAD shows a consolidation around the 78.6% Fibonacci retracement level at 1.3714. The pair is slightly above the 20-day Simple Moving Average (SMA) at 1.3674, facing resistance at the 50-day SMA at 1.3733. Key resistance levels include the June high at 1.3798 and the psychological barrier at 1.3900. Support levels are found at the psychological mark of 1.3600 and the June low at 1.3540.

Factors Influencing The Canadian Dollar

The Canadian Dollar is affected by Bank of Canada interest rates, oil prices, economic health, and trade balances. The Bank of Canada aims to keep inflation between 1-3% through interest rate adjustments. Rising oil prices and a positive trade balance help strengthen CAD. While inflation can weaken a currency, higher interest rates tend to attract investment, which boosts the currency. Key economic indicators like GDP, PMIs, employment rates, and sentiment surveys can shift CAD’s trajectory. A strong economy supports CAD and encourages investment, potentially leading to interest rate hikes. Given the mixed economic signals, we expect the USD/CAD pair to stay within a consolidation phase. Traders in derivatives should explore strategies that can benefit from range-bound movement or sudden volatility spikes. Currently, the market shows the 30-day implied volatility for USD/CAD at around 6.5%, indicating fairly stable but not completely calm conditions. Waller’s comments are influencing market expectations, with the CME FedWatch Tool suggesting a greater than 65% chance of the Federal Reserve cutting rates in September. This creates downward pressure on the US dollar, making call options on the Canadian dollar (or put options on USD/CAD) appealing as a speculative opportunity. We see this as a major factor that could limit gains for the currency pair. On the Canadian side, the steady price of West Texas Intermediate (WTI) crude oil over $80 per barrel is supportive for the loonie. However, this is balanced by the Bank of Canada’s recent rate cut and a cautious stance on future changes, resulting in mixed effects on the currency. This combination reinforces our view of a stable trading environment in the near term. We recommend that traders use the technical levels mentioned as a reference for option strategies. An iron condor, with strikes sold around the 1.3600 and 1.3800 levels, might benefit from the pair staying within this range. Alternatively, a long strangle strategy—buying both a call and a put option—could profit from a breakout due to unexpected economic data. Political uncertainty, particularly with the approaching US election, poses a significant risk that might affect the current technical outlook. We expect that as the election draws closer, implied volatility will increase, raising options premiums. Traders should keep this potential change in mind for any medium-term strategies. Historically, periods leading up to a Fed policy shift, like in mid-2019, often feature choppy, sideways trading before a clear trend forms. At that time, the USD/CAD pair experienced weeks of indecision before eventually breaking lower when rate cuts were confirmed. We may be witnessing a similar situation now, rewarding those who practice patience and range-dependent strategies. Create your live VT Markets account and start trading now.

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