USD/CAD strengthens to approximately 1.4155 during the early European session on Monday. The constructive tone of the pair remains intact; however, a temporary sell-off cannot be ruled out given the overbought conditions. The immediate resistance level is identified at 1.4190, while the initial downside target to monitor is 1.4070. The USD/CAD pair is positioned in positive territory, hovering around 1.4155 during the early European trading hours on Monday. The US Dollar edges higher against the Canadian Dollar as hawkish Federal Reserve expectations build. Traders are poised for insights from the Federal Reserve regarding the trajectory of US interest rates, particularly in anticipation of the forthcoming Nonfarm Payrolls data later this week. Cleveland Fed President Beth Hammack expressed concern on Friday regarding the potential for persistently high inflation to lead the American public to normalise elevated prices. She emphasised that it is crucial for the central bank to prevent this from occurring. Meanwhile, Philadelphia Fed President Anna Paulson stated, “Some modest further tightening may be warranted.”
Hawkish remarks from Fed officials have intensified speculation regarding further interest rate hikes, thereby bolstering the Greenback. At present, there is a 65% likelihood of an interest rate increase from the Federal Reserve during its upcoming meeting at the end of October, as indicated by the CME FedWatch tool. Conversely, increasing crude oil prices may support the commodity-linked Loonie. The WTI price experienced an increase on Monday following US President Donald Trump’s dismissal of a peace agreement with Iran aimed at resolving their conflict and reopening the Strait of Hormuz. It is important to recognise that Canada stands as a significant player in the oil export market, and elevated crude oil prices typically exert a favourable influence on the CAD. Strategists point out that upcoming Bank of Canada communication will be closely watched, with “Dep. Gov. Gravelle is scheduled to speak on Tuesday, and Sr. Dep. Gov. Wilkins will speak on Thursday.” They note that market pricing for near-term policy moves remains cautious, as “pricing for October is relatively light, pricing a 50/50 chance of a 25bpt hike while December is priced for a cumulative 34bpts of tightening.”
Against this backdrop, Scotiabank highlights that “wider US-Canada spreads have been a major headwind for the CAD over the past couple of weeks,” but argue that the recent move “feels somewhat stretched with limited scope for further tightening in Fed expectations while the BoC feels somewhat underpriced.” This combination of compressed policy expectations and upcoming BoC speeches leaves room, in their view, for Canadian Dollar dynamics to shift if domestic rate prospects are repriced higher. Fed’s Hammack conveyed a moderately hawkish message, achieving an FXS Speechtracker score of 7.2 out of 10, which is marginally softer compared to the historical average of 7.5 out of 10. The emphasis on the “biggest risk” being the formation of an inflationary mindset, alongside concerns about demand and capital expenditure pressures, highlights a significant focus on preventing a de-anchoring of inflation expectations, even as growth and the job market continue to demonstrate resilience. The insistence that policy must remain at a restrictive stance to lower inflation indicates a limited appetite for near-term easing in the context of the United States Dollar.
The FXS Fed Sentiment Index decreased by 0.34 points to 147.72, reflecting a slight reduction in perceived hawkishness in the aftermath of the speech. Despite the decline, the index remains firmly in hawkish territory above 100, indicating that Fed communication continues to prioritise inflation-fighting resolve, even as the tone cools slightly compared to the FXS Speechtracker baseline. In the daily chart, USD/CAD exhibits a bullish near-term bias as the spot remains above the 100-day simple moving average and the Bollinger middle band. Price is advancing into the upper portion of the Bollinger envelope, while the Relative Strength Index (14) at 73 indicates overbought conditions, suggesting that upside momentum is extended despite the broader trend continuing to show support. On the topside, the immediate resistance level is situated at the Bollinger upper band near 1.4190, where buying pressure may begin to diminish. The next hurdle to monitor is the June 24 high of 1.4248, as it approaches the April 1, 2025 high of 1.4415. On the downside, initial support is identified at the July 27 high of 1.4070, succeeded by the 1.4000 psychological threshold. Any follow-through selling below this level could expose the 100-day SMA at 1.3970, followed by the Bollinger middle band near 1.3945 and the Bollinger lower band at 1.3700.
