USD/CAD traded higher around 1.3945 in early European dealings on Monday, the firmest level since 3 April, with demand for the US dollar supported by heightened Middle East geopolitical tensions. A stronger-than-expected US jobs report also pushed up expectations of tighter policy, with markets assigning more than a 70% probability of a Federal Reserve rate rise in December, compared with 45% a week earlier, according to CME FedWatch.
Technically, the pair remains above the 100-day SMA and the 20-day Bollinger middle band, keeping the upward bias intact, although the RSI at 73 points to overbought conditions and the risk of consolidation. Price was pressing the upper Bollinger Band near 1.3950, which marks immediate resistance; a daily close above that area would open 1.4000. Initial support sits at 1.3881, then 1.3805, followed by the 100-day SMA at 1.3722, with a deeper cushion near 1.3660.
Policy Divergence And Trading Strategies
The strong upward move in USD/CAD is something we need to act on, as it tests the 1.3950 level. The recent US jobs report for May 2026, which showed a robust gain of 255,000 jobs, reinforces the case for a strong dollar and a potentially hawkish Federal Reserve. This contrasts sharply with Canada’s recent Q1 2026 GDP figures, which showed a sluggish 0.9% annualized growth, suggesting the Bank of Canada may need to remain dovish.
Given this clear policy divergence, we are looking at strategies that benefit from a continued rise in the pair. We believe buying call options with strike prices at 1.4000 and 1.4050 for July expiration offers good upside potential. A bull call spread could also be used to reduce the initial cost, given that implied volatility has ticked higher.
However, the overbought RSI reading above 70 suggests the rally is stretched and a short-term pullback is possible. To manage this risk, we are considering buying some short-term put options with a strike near 1.3850 as a hedge against any sudden reversal. This provides a safety net if the pair consolidates before its next leg up.
Oil Prices, Canadian Dollar Weakness, And Upcoming Data
The weakness in the Canadian dollar is also being fueled by softer oil prices, with WTI crude currently struggling to hold above $78 a barrel due to concerns about global demand. Historically, periods of WTI weakness, like the dip we saw in late 2024, have consistently weighed on the CAD. We expect this headwind to persist for the Canadian dollar.
Looking ahead, the upcoming US and Canadian CPI inflation reports will be critical. We anticipate the data will confirm hotter price pressures in the US compared to Canada. This would further support our view for a stronger USD/CAD exchange rate in the coming weeks.
