USD/CAD is currently stable as traders analyze the US’s tariff threats to the EU and Mexico. They are also waiting for inflation data. The US Dollar sits at about 1.3690 against the Canadian Dollar with a 30% tariff threat on imports affecting market mood. Possible tariffs of 35% on Canadian goods and 50% on copper exports to the US could hurt Canada’s export sector. However, positive employment data has eased worries about potential rate cuts from the Bank of Canada in July.

Upcoming Inflation Reports

On Tuesday, Canada will release its Consumer Price Index (CPI), which will shed light on inflation and influence decisions made by the central bank. At the same time, the US will publish its inflation data, with expectations for a 3% increase in core CPI for June. A higher US CPI could strengthen the US Dollar by affecting the Federal Reserve’s interest rate choices, which in turn influences the USD/CAD outlook. Technically, USD/CAD is near the 20-day SMA at 1.3670, with resistance at the 50-day SMA around 1.3745. The Relative Strength Index is at 51, indicating neutral momentum. A drop below 1.3670 could lead to further declines, depending on inflation outcomes. A strong Canadian CPI might boost the Loonie, pushing USD/CAD lower. Given the current standoff, we see the next few weeks as a time for active strategies instead of passive observation. The scene has shifted since this analysis was first written. Critical Canadian inflation data has come in, altering the entire outlook. Statistics Canada reported on June 25th that the annual inflation rate unexpectedly dropped to 2.8% in May. This supports a higher chance of a rate cut from the central bank, with money markets now estimating over a 70% likelihood of a cut by the September meeting, fundamentally weakening the Loonie’s outlook.

Impact of Monetary Policy Divergence

At the same time, the situation in the US provides a sharp contrast. The recent US inflation report showed the core CPI stubbornly holding at 3.4% year-over-year for June, surpassing predictions. This supports the Federal Reserve’s careful, data-driven approach and pushes potential rate cuts further away. This growing difference in monetary policy is the key focus for us. The US Dollar’s yield advantage is widening, offering strong support for this currency pair. Thus, our strategy is to view the current tight range not as neutrality, but as a base for a possible upward movement. We see the 20-day simple moving average as a support level rather than a midpoint. For traders looking for a breakout, buying call options with strike prices just above the 50-day SMA, targeting levels like 1.3800 or 1.3850, looks attractive for its risk-reward profile. This strategy allows participation in a potential rally driven by the widening interest rate gap, while also defining risk to the premium paid. The backdrop of trade tariffs adds volatility. We recall the unpredictable swings of the 2018-2019 trade disputes. While we don’t expect immediate action, the persistent threat of tariffs before the 2026 USMCA review suggests that maintaining some longer-dated volatility through options could be a wise hedge against unexpected political events. Any aggressive remarks could easily push the pair past technical resistance levels. For now, we’re focusing on the recent weak Canadian data and strong US data as our main signals, setting up for a move that aligns with the clear divergence in central bank outlooks. Any dip towards the 1.3670 level should be viewed as a chance to build a long position, as the underlying support for the US Dollar in this pair is now significantly stronger. Create your live VT Markets account and start trading now.

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