USD/CAD traded in a tight range near 1.3700 during Tuesday’s European session, ahead of Bank of Canada and Federal Reserve policy decisions due on Wednesday. Both central banks are expected to keep interest rates unchanged. Middle East conflicts have lifted global inflation expectations and increased concerns about higher price pressures. The CME FedWatch tool shows the Fed is unlikely to cut rates before September, and the implied chance of a September cut has fallen to almost 50% from 73% a week earlier.

Oil Prices And Inflation Outlook

Oil prices have risen on supply disruption linked to the conflict, pushing up petrol prices in the US and other major economies. This may reduce household purchasing power. The US Dollar Index (DXY) was flat, trading slightly below 100.00 after giving back earlier gains. USD/CAD was nearly unchanged around 1.3700 and remained above the 20-day EMA near 1.3655. The 14-day RSI has stayed in the 40.00–60.00 range for over six weeks, pointing to sideways trade. Resistance levels are 1.3715 and 1.3750, while support is seen at 1.3655, then 1.3615 and 1.3580. The Fed targets price stability and full employment, with a 2% inflation goal. It holds eight policy meetings a year, can use QE to add liquidity, and QT to reduce bond holdings.

Policy Divergence And Market Positioning

We are looking at a different landscape for USD/CAD compared to early last year. We remember the pair consolidating around the 1.3700 mark in March 2025 as markets waited for central bank direction. Today, the divergence in policy that we were anticipating has become much clearer, pushing the pair towards the 1.3850 level. The key driver has been the timing of interest rate cuts, which has unfolded over the past several months. The Bank of Canada initiated its easing cycle in the fourth quarter of 2025, responding to slowing domestic growth and inflation that was trending down. The Federal Reserve, facing more persistent core inflation in the United States, held rates steady for longer and only began its own cutting cycle last month in February 2026. This policy gap is backed by the latest economic data we’ve seen. Canada’s most recent inflation report for February 2026 showed CPI at 2.5%, well within sight of the BoC’s 2% target. In contrast, the latest US CPI data released last week showed inflation holding at a stickier 3.1%, giving the Fed reason to remain cautious. The inflation fears from Middle East conflicts that concerned us in early 2025 did cause a spike in oil prices mid-year, but those pressures have since moderated. WTI crude oil has settled into a range around $75 per barrel, down significantly from its 2025 highs of over $90. This has helped ease headline inflation but has not resolved the underlying core price pressures in the US. For derivative traders, this established trend of policy divergence suggests focusing on strategies that benefit from continued US dollar strength against the Canadian dollar. We should consider buying USD/CAD call options with expiries in the second quarter to position for a potential move toward the 1.4000 level. Implied volatility has come down from last year’s peaks, making option premiums more reasonable for expressing a directional view. The interest rate differential, which now more clearly favors the US, is also being reflected in the forward markets. We are seeing forward points price in a sustained premium for holding US dollars over the coming months. This makes long USD/CAD forward contracts a straightforward way to gain exposure to this ongoing macroeconomic theme. Create your live VT Markets account and start trading now.

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