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Canadian Dollar edges higher vs soft USD; bulls seem hesitant amid mixed cues

  • USD/CAD meets with a fresh supply amid a softer USD, though the downside seems limited.
  • Retreating oil prices, the divergent BoC-Fed expectations, and Trump’s tariffs favor USD bulls.
  • Traders look to flash US PMIs for some impetus as the focus remains on the FOMC next week.

The USD/CAD pair attracts fresh sellers during the Asian session on Friday and currently trades around the 1.4070 zone, down 0.10% for the day amid a softer US Dollar (USD). Spot prices, however, hold above the previous day’s swing low and remain on track to register modest gains for the first time in three weeks.

Crude oil prices retreat from the highest level since June 11 amid some profit-taking heading into the week. Adding to this, divergent Bank of Canada (BoC) and US Federal Reserve (Fed) policy expectations, along with US President Donald Trump’s new tariffs, contribute to keeping a lid on the commodity-linked Loonie. Moreover, the underlying USD bullish tone warrants some caution before placing aggressive bearish bets on the USD/CAD pair.

This week’s soft Canadian consumer inflation figures reaffirmed bets that the BoC will keep interest rates unchanged through the remainder of 2026. In contrast, traders have been pricing in a greater chance that the US central bank will raise borrowing costs by the end of this year amid concerns about energy-driven inflation. Apart from this, a further escalation of tensions between the US and Iran should help limit deeper losses for the safe-haven buck.

Meanwhile, the Trump administration is set to impose sweeping new tariffs of 10% to 12.5% on 60 of the top trading partners, covering nearly all of the country’s imports. This further tempers investors’ appetite for riskier assets amid persistent geopolitical uncertainties and favors USD bulls, making it prudent to wait for some follow-through selling before confirming that the USD/CAD pair’s recovery from over a one-month low has run out of steam.

Traders now look forward to the release of the flash US PMIs, which might influence the USD. Furthermore, fresh developments surrounding the Middle East crisis will drive oil price dynamics and provide some impetus to the USD/CAD pair amid a broadly constructive setup. The focus will then shift to the highly-anticipated two-day FOMC meeting next week, which will help in determining the near-term trajectory for the Greenback and the currency pair.

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Euro rises as US Dollar weakens despite rising Middle East tensions

  • EUR/USD may fall as escalating Middle East tensions drive up oil prices and fuel Fed rate hike expectations.
  • President Trump threatens massive military strikes against Iran and plans new 10% to 12.5% global import tariffs.
  • The ECB held key interest rates steady while warning that persistent energy shocks present ongoing inflation risks.

EUR/USD gains ground after posting modest losses in the previous day, trading around 1.1380 during the Asian hours on Friday. However, the potential upside for the pair could be limited as the US Dollar (USD) may regain strength, largely driven by escalating conflicts in the Middle East that threaten to push crude oil prices higher. An oil-driven inflation spike has fueled expectations that the US Federal Reserve (Fed) might resume raising interest rates.

According to the CME FedWatch tool, money markets are currently pricing in roughly a 35.8% chance of a Fed rate hike this month, alongside an 82.1% probability of at least a quarter-point hike in September.

Geopolitical tension continues to surge following reports that Yemen’s Iran-backed Houthi militant group attacked two Saudi oil tankers in the Red Sea for allegedly violating a blockade. In response, the US conducted its 13th consecutive night of military strikes on Iran. Tensions escalated further after US President Donald Trump warned of “major military punishment” for both the Houthis and Iran if attacks continue, stating he is close to deciding on a massive, unprecedented military operation against Iran.

Simultaneously, trade concerns are mounting after Bloomberg reported that the United States plans to impose new tariffs ranging between 10% and 12.5% on imports from major trading partners. This marks a major effort to rebuild the Trump administration’s trade barrier following a recent Supreme Court ruling. Under this plan, imports from the European Union will face tariffs of at least 10%, structured to remain compliant with existing US-EU trade agreements.

Market participants process the European Central Bank’s (ECB) latest monetary policy decisions. While the ECB Governing Council reaffirmed its commitment to bringing inflation down to its 2% medium-term target, it cautioned that high uncertainty persists and the full inflationary impact of the energy shock has yet to materialize. Following a 25-basis-point rate hike in June, the ECB opted to hold its key interest rates steady, keeping the deposit facility, main refinancing, and marginal lending rates at 2.25%, 2.40%, and 2.65%, respectively.

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Chart of The Day – No changes in the Far East, USD/JPY Hits New Highs

USD/JPY is breaking out to new 40-year highs above 163.30 , and the market is signalling that the acceleration in the pace of the BOJ’s rate rises is already largely priced in.

Traffic conditions on the D1

The price has broken through the previous resistance level of 163.00 (purple line) and is reaching new highs in the 163.30–163.40 range, whilst the RSI (14) remains in a strong uptrend at around 69.4, close to the overbought zone. The candlesticks are holding above the EMA50 (161.32), EMA100 (160.13) and EMA200 (158.12), and the EMA configuration (rising, in the order 50 > 100 > 200) confirms a strong bullish trend. The price is close to the upper Bollinger Band (163.92), which signals strong momentum but also the risk of a short-term correction before the next attempt to break through the resistance at 164.00.

Why do the markets already price in faster BOJ rate rises?

The OIS (overnight index swap) market for 22 July 2026 implies a rate of 0.981 per cent, compared with an effective rate of 0.977 per cent, whilst contracts up to the 18 December meeting are already pricing in a rise to 1.277 per cent – effectively discounting approximately 1.2 rate rises in full. This means that reports of the BOJ’s readiness to accelerate the pace of rate rises come as no surprise to the market – investors began pricing in a more aggressive cycle well ahead of the consensus among economists.

This is also confirmed by the table of 1-month price changes: the cumulative change (“Total Change 1M”) for Japan is zero, which indicates that the market is no longer revising its forecasts upwards, but is instead stabilising following the earlier movement – the “faster pace” is, to a large extent, already behind us in terms of prices. Source: Bloomberg Financial LP

Carry trade remains dominant despite rate rises

The interest rate differential between Japan (1.00%, following a rise to a 31-year high) and the effective US rate (3.63%) remains huge, and the two-year US-Japan yield spread has widened to 285 basis points – its widest level since August last year. Even a potential further 25 bp rate rise would do little to reduce the appeal of this spread, which is fuelling carry trades based on the low cost of yen-denominated financing relative to high-yielding currencies such as the BRL, MXN and AUD.

The fundamental ‘loop’ driving the yen’s weakness

Apart from monetary policy, the yen is suffering from a ‘doom loop’ – Prime Minister Sanae Takaichi’s loose fiscal policy (debt-to-GDP ratio over 200 per cent) combined with the BOJ’s insufficiently tight monetary policy, which is pushing the yield on 10-year JGBs up to 2.90 per cent, the highest level in 30 years. Finance Minister Satsuki Katayama has once again signalled her readiness to take “decisive action” in the foreign exchange market, however, interventions to date (totalling around US$215 billion since 2022) have failed to reverse the trend of yen weakness on a sustained basis, which undermines the credibility of such announcements in the eyes of investors.

The options market confirms that there are no fears of a shock

The falling 1-month ATM implied volatility for USD/JPY since 2022, despite the deepening weakness in the spot market, suggests that options are not pricing in any significant risk of a sudden reversal – such as a sharp intervention or an unexpected rate hike – but rather a continuation of the current narrative regarding the currency. Source: Bloomberg Financial Lp

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Japan Signals Readiness to Act on Yen Weakness

Japan’s Finance Minister Satsuki Katayama said on Wednesday that the government remains prepared to intervene in currency markets if excessive exchange-rate moves threaten financial stability, after the yen weakened beyond JPY 163 per U.S. dollar to its lowest level in about 40 years. Speaking to reporters, Katayama declined to comment on specific exchange-rate levels but reiterated that authorities stand ready to act if necessary. The remarks reinforce the government’s long-standing position of closely monitoring currency movements and signal that policymakers remain willing to step into the foreign-exchange market should volatility become excessive, even as they avoid specifying a level that could trigger intervention.

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Canadian Dollar edges higher amid bullish oil prices; upside potential seems limited

  • USD/CAD edges lower during the Asian session, though the downside remains limited.
  • Bullish oil prices underpin the Loonie and cap spot prices amid subdued USD demand.
  • The divergent Fed-BoC policy bets back the case for the emergence of some dip-buying.

The USD/CAD pair struggles to capitalize on its strong weekly gains registered over the past two days and edges lower during the Asian session on Wednesday. Spot prices currently trade around the 1.4100 round figure, though the fundamental backdrop warrants caution for aggressive bearish traders.

Crude Oil prices climb to a fresh high since June 16 amid escalating US-Iran military conflicts, the closure of the Strait of Hormuz and Houthi threats of a naval blockade on Saudi Arabia. This, in turn, is seen lending some support to the commodity-linked Loonie. The US Dollar (USD), on the other hand, pauses for a breather following a four-day move higher and turns out to be another factor acting as a headwind for the USD/CAD pair.

Meanwhile, the ongoing fighting in the Middle East, along with fresh trade war fears, might continue to underpin the safe-haven Greenback. In fact, US President Donald Trump announced a new tariff plan on imported generic drugs, with duties set to rise sharply to 100% from 2028 and then increase further to 200% the next year. This follows a new tariff of 50% on most Canadian products, which should cap the upside for the Canadian Dollar (CAD).

Furthermore, hawkish US Federal Reserve (Fed) expectations, bolstered by concerns about energy-driven inflation, favor the USD bulls. In contrast, this week’s soft Canadian consumer inflation figures reaffirmed bets that  the Bank of Canada (BoC) will keep rates unchanged through the remainder of 2026. This, in turn, suggests that the path of least resistance for the USD/CAD pair is to the downside and backs the case for the emergence of dip-buyers.

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UK CPI set to show receding inflation in June as GBP/USD fails at May highs

  • The UK’s ONR Office publishes the June CPI data on Wednesday.
  • The UK headline CPI is expected to ease toward 2.7% from a year earlier.
  • Core inflation is also seen easing toward 2.5% over the last 12 months.

The UK Office for National Statistics (ONS) will release the June Consumer Price Index (CPI) figures on Wednesday at 06:00 GMT, a print that will matter for markets. Consensus expectations point to inflation pressures still above the Bank of England’s (BoE) target, although losing further momentum.

UK consumer inflation remains one of the most important inputs for the BoE and typically carries real weight for the British Pound (GBP). Following the latest cautious hold by the BoE on June 18, investors now favour a steady hand by the ‘Old Lady’ at its meeting on July 30.

What to expect from the next UK inflation report?

Headline UK CPI is expected to clock 2.7% in the year to June, a tad lower than the May reading. On a monthly basis, inflation is seen gaining 0.1%, adding to the 0.2% increase recorded the previous month.

Core inflation, which strips out the more volatile food and energy components and is therefore more closely watched by the BoE, is forecast at 2.5% on an annual basis, down a tenth of percent from May.

How will the UK CPI data affect GBP/USD?

The BoE met expectations and kept the bank rate unchanged at 3.75% on June 18. However, the 7–2 vote split carried a slightly more hawkish tone, with Megan Greene joining Huw Pill in supporting a 25-basis-point increase. But the larger message is patience, with policy still firmly in wait-and-see mode and market pricing that reflects that stance.

In his latest comments last week, Governor Andrew Bailey said the renewed hostilities in the Gulf highlighted the instability facing the global economy. Turning to the UK, he argued that the country was supported by both its fiscal framework and monetary policy, while stressing that the central challenge remained economic growth.

Bailey added that the UK’s core banking system was resilient and that debt levels were not overstretched. However, he warned that sustainable economic growth would not be possible without financial stability.

Implied rates currently suggest nearly 43 basis points of tightening by year-end, while consensus sees the central bank keeping its policy rate unchanged at its next gathering on July 30.

Back to technicals, Senior Analyst at FXStreet, Pablo Piovano, notes that the recent multi-week recovery in GBP/USD appears to have encountered some initial hurdle in the 1.3550-1.3560 band near the July tops. “In case bulls regain the upper hand, the next barrier emerges at the May top at 1.3653 (May 11), followed by the YTD ceiling at 1.3868 (January 27),” he adds.

On the downside, Piovano sees initial contention at current yearly lows near 1.3140 (June 24). “Further weakness from here could expose a move toward the November 2025 base at 1.3010 (November 5),” Piovano adds.

Piovano also points out that momentum indicators remain somewhat bullish for now as the Relative Strength Index (RSI) hovers just below 54, while the Average Directional Index (ADX) near 18 suggests the current trend lacks muscle.

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New Zealand Dollar Holds Near 6-Week High

The New Zealand dollar steadied at 0.582, remaining near a six-week high, supported by growing expectations of further interest rate increases following a hot inflation reading. New Zealand’s annual inflation accelerated to 4.1% in Q2 from 3.1% in Q1, exceeding both market forecasts of 4% and the RBNZ’s projection of 3.9%. It marked the highest level since Q4 2023 and pushed inflation further above the central bank’s 1–3% target range. The hot print solidified wagers that the central bank will deliver another 25-basis-point rate hike in September, with swaps also implying additional increases in either October or December, followed by another move in February next year. Last week, RBNZ Chief Economist Paul Conway said that Middle East-driven inflation risks to the third quarter outlook have increased, and that some further reduction in monetary stimulus is likely to be needed.