- USD/CAD declines to near 1.3860 in Monday’s early European session.
- Lower Fed rate hike expectations weigh on the US Dollar.
- Major financial institutions expect the BoC to remain on hold for the remainder of 2026.
The USD/CAD pair edges lower to around 1.3860 during the early European session on Monday. The US Dollar (USD) extends the decline against the Canadian Dollar (CAD) as traders pare bets on the US Federal Reserve (Fed) rate hikes. Canada’s Consumer Price Index (CPI) inflation data for July will take center stage later on Friday.
The pair declines to the lowest since June 3 after a soft run of US economic data, including an unexpected drop in Retail Sales. Signs of easing inflation in the US have prompted the market to give up bets for an imminent rate hike from the US central bank. A rate hike next month is now priced at 30%, down sharply from about 40% a week earlier, according to the CME FedWatch tool.
“This points to a material slowdown in real consumer spending growth in the third quarter,” said Sal Guatieri, a senior economist at BMO Capital Markets. “This, together with a weaker jobs report and subdued core CPI inflation, raises the odds of the FOMC staying patient again in September,” Guatieri added.
The Bank of Canada (BoC) left its key overnight interest rate unchanged at 2.25% during its July policy meeting, marking the sixth consecutive hold. BoC Governor Tiff Macklem emphasized that while the Canadian central bank is looking through near-term energy shocks, it “will not let higher energy prices become persistent inflation.”
The BoC will hold the next policy meeting on September 2. RBC Economics and CIBC expect that the central bank will remain on hold for the remainder of 2026 to fully monitor economic conditions.
Canada inflation seen contained as BoC pause expectations firm
Strategists at Brown Brothers Harriman expect the upcoming Canada July CPI report to underscore subdued underlying price pressures and support an extended BoC pause. They look for headline CPI to edge up to “2.9% y/y vs. 2.8% in June,” while stressing that “underlying inflation [is] contained under 2%.” BBH forecasts “core CPI (ex. food & energy) … at 1.8% y/y vs. 1.8% in June,” with “core CPI (average of trim and median) … projected at 1.85% for a second straight month,” reinforcing the view that core inflation remains firmly anchored below the BoC’s 2% threshold.
Technical Analysis: USD/CAD
In the daily chart, USD/CAD remains under pressure, holding beneath the 100-day simple moving average (SMA) and the Bollinger middle band, which keeps the near-term bias bearish despite a modest rebound off the lower band. Price is hovering just above the Bollinger lower band, while the Relative Strength Index (14) sits in oversold territory around 28, hinting that downside momentum is stretched but not yet reversed.
On the topside, initial resistance is located at the 100-day SMA around 1.3920, with a stronger cap at the Bollinger middle band near 1.4010; a daily close above these levels would be needed to ease the current downside bias, with the upper band at 1.4170 acting as a subsequent barrier. On the downside, immediate support is aligned with the Bollinger lower band at 1.3855; a clear break below this floor would open the way to further weakness, while holding above it would signal an attempt to consolidate after the recent slide.
