The USD/CAD currency pair fell sharply in early Asian trading on Friday, retreating to the 1.3600 handle, its lowest level since October 2024. This downward momentum reflects a combination of weaker-than-expected US inflation data, particularly the Producer Price Index (PPI), and a resurgence in crude oil prices tied to geopolitical tensions.
With the Federal Reserve’s (Fed) monetary policy outlook shifting and market sentiment turning cautious, traders are rebalancing expectations for the US Dollar (USD) and the Canadian Dollar (CAD), also known as the Loonie. Gradiopexo’s brokers break down this matter with precision and clarity in the article below.
Weaker US PPI Undermines the Greenback
The latest data from the US Bureau of Labor Statistics showed that headline PPI rose by only 0.1% month-over-month (MoM) in May. This was notably below market expectations of a 0.2% increase, and followed a downwardly revised 0.2% decline in April (originally -0.5%).
The core PPI, which excludes the volatile food and energy components, also increased by 0.1%, missing the consensus estimate of a 0.3% rise.
These disinflationary signals point to easing price pressures in the pipeline, bolstering the argument for monetary policy easing later this year. Markets responded swiftly: US Treasury yields dropped across the curve, with the 2-year yield slipping below 4.70%, while the US Dollar Index (DXY) weakened broadly against its G10 counterparts.
The USD/CAD pair, which is particularly sensitive to interest rate differentials and commodity market movements, succumbed to selling pressure. A decline in rate hike expectations has now evolved into speculation of rate cuts, with futures markets pricing in a 25 basis point (bps) cut in September and another by October.
Canadian Dollar Finds Support in Crude Oil Rally
At the same time, the Canadian Dollar received a boost from the rally in crude oil prices, reinforcing its role as a commodity-linked currency. Tensions in the Middle East intensified after reports from the Wall Street Journal suggested that an Israeli attack on Iran could occur “within days,” according to US and Israeli officials.
These geopolitical developments pushed WTI crude above $79 per barrel, lifting Canada’s terms of trade and strengthening the CAD.
Canada, being the largest oil exporter to the United States, is highly correlated with oil price movements. Rising crude prices tend to increase foreign exchange earnings and attract capital inflows into the Canadian economy. As a result, this oil-induced tailwind amplified the bearish tone for USD/CAD, pushing the pair toward a critical technical support level.
Fed Policy Repricing Adds Downside Pressure
With the Federal Reserve’s next interest rate decision on the horizon, the markets have quickly recalibrated their expectations. While the Fed is still expected to keep the Federal Funds Rate unchanged in the 4.25%–4.50% range at its June meeting, soft inflation data is reinforcing the case for monetary easing in the second half of 2025.
This shift in monetary policy stance weakens the USD’s appeal in the FX markets, especially against currencies backed by strong economic fundamentals or commodity exposure, such as the CAD. Adding to this, the University of Michigan Consumer Sentiment Index, set to be released later on Friday, could further influence the direction of the USD. A weaker reading might validate the disinflation trend and push yields and the dollar lower still.
Technical Outlook: 1.3600 as Key Pivot
Technically, the USD/CAD pair has breached a multi-month support zone near 1.3630, confirming a short-term bearish bias. The current level around 1.3600 represents a key psychological threshold, and a break below it could expose further downside toward 1.3520, followed by 1.3450, a level last seen in August 2024.
Momentum indicators, including the Relative Strength Index (RSI) on the 4-hour and daily charts, suggest increased downside momentum. The RSI is now hovering near the 30-mark, pointing to an oversold condition, though this does not preclude further weakness if the fundamental backdrop continues to favor the CAD.
Final Thoughts
In summary, the USD/CAD plunge toward 1.3600 is a multi-faceted reaction to cooling US inflation, waning Fed hawkishness, and rising geopolitical risk premia in oil markets. As traders await fresh US data and Fed guidance, the balance of risks remains tilted in favor of the Canadian Dollar, especially if crude oil remains elevated and rate cut bets gain further traction.
