- USD/CAD retains a bullish bias and continues to draw support from a combination of factors.
- Domestic growth concerns and the divergent BoC-Fed expectations undermine the Loonie.
- Geopolitical risks benefit the safe-haven USD and further offer some support to spot prices.
The USD/CAD pair climbs to a nearly two-week high during the Asian session on Thursday, with bulls now looking to build on the positive momentum further beyond the 1.3900 mark.
The Canadian Dollar (CAD) continues with its relative underperformance against the US Dollar amid slowing domestic growth, a softening labor market, and interest rate divergence between the Bank of Canada (BoC) and the US Federal Reserve (Fed). In fact, Canada faced consecutive quarters of economic contraction during the January-March 2026 period, confirming a technical recession. Adding to this, rising unemployment and weakening consumer demand could force the BoC to adopt a more dovish stance.
In contrast, traders are currently assigning over a 50% chance that the Fed will raise interest rates in 2026 amid sticky inflation. This, along with persistent geopolitical uncertainties, acts as a tailwind for the safe-haven USD and continues to offer some support to the USD/CAD pair. In the latest development surrounding the Middle East conflict, the US military said on Tuesday that it had intercepted and defeated a series of Iranian missile and drone attacks targeting regional neighbors – Kuwait and Bahrain.
Furthermore, the lack of a breakthrough in US-Iran diplomatic negotiations, amid a standoff over Tehran’s nuclear program and the Strait of Hormuz, keeps geopolitical risks in play. This, in turn, assists Crude Oil prices in preserving weekly gains registered over the past three days, which helps limit further losses for the commodity-linked Loonie. Adding to this, the Israel-Lebanon agreement on the implementation of a ceasefire keeps a lid on the safe-haven USD and contributes to capping the upside for the USD/CAD pair.
Investors also seem hesitant and opt to wait for the release of monthly employment details from the US and Canada on Friday. The crucial US Nonfarm Payrolls (NFP) report will be looked for more cues about the Fed’s policy path, which, along with the incoming geopolitical headlines, will drive the USD demand. Moreover, Crude Oil price dynamics should provide a fresh impetus to the USD/CAD pair. Nevertheless, the fundamental backdrop suggests that the path of least resistance for spot prices is to the upside.
