USD/CAD extended Wednesday’s breakout above the 1.3810–1.3815 zone and rose for a third session, trading near 1.3870 in Asia to reach its highest level since 13 April. The move has been underpinned by broad US Dollar strength as risk sentiment weakened following new Middle East developments that lowered expectations of a near-term diplomatic solution to the Iran conflict, lifting demand for the greenback as a safe haven. Further support came from market pricing for a potential Federal Reserve rate hike in 2026, while the advance held even as crude oil rebounded, a backdrop that typically benefits the Canadian Dollar.
On the charts, the pair retained a bullish bias after a decisive close above the 200-day simple moving average and the 61.8% Fibonacci retracement of the April–May decline, though it paused near the 78.6% level around 1.3875. Momentum indicators were mixed, with the RSI near 70 suggesting overbought conditions, while the MACD stayed in positive territory. A break above 1.3875 would focus attention on 1.3963, whereas support is seen at 1.3810, then 1.3758 and 1.3709, with further downside levels cited at 1.3649 and 1.3552; the original technical analysis was produced with assistance from an AI tool.
Drivers Of USD/CAD Uptrend: Geopolitics And Policy Divergence
We are seeing significant upward momentum in USD/CAD, which has now cleared the 1.3810 area and is trading near 1.3870, its highest point in over a month. The primary drivers are a flight to the US Dollar due to geopolitical tensions in the Middle East and, more importantly, shifting expectations around Federal Reserve policy. The market is now seriously considering the possibility of another Fed rate hike in 2026.
This hawkish Fed outlook is backed by recent data showing US inflation for April came in hotter than anticipated at 3.8%, while the latest jobs report confirmed robust employment and wage growth. As a result, futures markets are now pricing in about a 25% chance of a rate hike by the Fed’s July meeting. This contrasts sharply with the situation in Canada, where we see inflation holding steady at a more manageable 2.7%.
This policy divergence between a potentially hiking Fed and a neutral Bank of Canada is creating a strong tailwind for the pair. Even with WTI crude oil prices rising to around $85 a barrel, the impact on the Canadian dollar is being completely overshadowed. Historically, such periods of monetary policy divergence, like what we saw in 2022, have led to sustained periods of USD strength against the loonie.
Strategy Outlook: Options Positioning And Technical Levels
For the coming weeks, we believe derivative strategies should favor further upside in USD/CAD. Buying call options or implementing bull call spreads with strike prices targeting a move toward the 1.3960 level seems prudent. Although technical indicators like the RSI are near overbought levels, suggesting a possible short-term pause, the underlying fundamental momentum remains strong.
We would view any dip back towards the 1.3810 support level not as a trend reversal, but as a more attractive entry point to add to long positions. Given the possibility of a brief pullback, selling out-of-the-money puts could be another way to express a bullish view. This strategy allows us to collect premium while waiting for either a continuation of the rally or a slight dip to establish a long position at a better price.
