The USD/CAD currency pair depreciated to around 1.3800 during Asian trading hours on Monday, erasing gains recorded over the previous two sessions. Market participants attribute the USD weakness to a prevailing dovish tone surrounding the US Federal Reserve’s (Fed) policy outlook, as traders increasingly anticipate a potential rate cut in September.
Amara Johns, a broker at AureliusHub, provides a comprehensive breakdown of this topic in her latest article. The US Dollar (USD) is under pressure as investors digest soft US economic data and remain wary of ongoing geopolitical trade risks, while the Canadian Dollar (CAD) benefits from a relatively stable Bank of Canada (BoC) policy stance.
US Economic Data Reinforce Dovish Fed Outlook
Recent US economic indicators support the case for a Fed easing cycle. The preliminary Michigan Consumer Sentiment Index fell to 58.6 in August, down from 61.7 in July, missing the expected 62.0 reading. This decline highlights slowing consumer confidence, which could weigh on domestic consumption in the coming months.
Retail Sales data further reinforces the dovish narrative. In July, US Retail Sales grew by 0.5% month-over-month, matching expectations but slower than the 0.9% rise recorded in June.
The Retail Sales Control Group, closely monitored by the Federal Reserve for underlying consumption trends, increased by 0.5%, underperforming the 0.8% growth reported in June.
The combination of subdued consumer sentiment and moderate retail growth points to slower economic momentum, supporting market expectations that the Fed may consider a policy rate cut in September. As a result, traders are pricing in a more accommodative monetary policy, putting downward pressure on the USD.
Geopolitical Risks Add Pressure to USD
Adding to the negative USD sentiment, the US Administration has expanded 50% tariffs on steel and aluminum imports, introducing 407 new product codes in the US Harmonized Tariff Schedule. The US President also indicated further announcements concerning steel tariffs and semiconductor levies, heightening geopolitical and trade-related uncertainty.
The combination of slower economic data and escalating trade tensions has contributed to USD weakness, pushing USD/CAD lower. Traders are factoring in the possibility of additional US monetary easing alongside potential trade disruptions, reinforcing the dovish outlook for the greenback.
BoC Policy: Inflation Holds, Rate Cuts Remain Measured
In contrast to the US, the Canadian Dollar (CAD) has been supported by a more stable Bank of Canada (BoC) policy stance. The BoC’s preferred inflation measure, the trimmed mean, remained elevated at 3% in June, signaling that inflationary pressures persist despite a moderation in headline CPI figures.
Although the BoC reduced the policy rate to 2.75% in July, it emphasized a cautious approach to further rate cuts. The central bank is weighing persistent service-sector price stickiness, tariff-related cost pressures, and softening demand, suggesting that aggressive easing is unlikely in the near term. The Canadian Dollar, therefore, benefits from a less dovish monetary stance relative to the US Fed, providing additional support to USD/CAD amid USD softness.
Technical Implications for USD/CAD
From a technical perspective, USD/CAD’s retreat to 1.3800 marks a critical support level, following two days of gains. Market participants are closely monitoring trend lines and psychological levels, as a break below 1.3800 could signal further USD depreciation toward 1.3750 or lower. Conversely, any rebound above 1.3850–1.3870 may face resistance from prevailing bearish sentiment driven by the dovish Fed outlook.
Traders are also keeping an eye on cross-market correlations, including US bond yields, equity performance, and oil prices, which historically influence USD/CAD dynamics. Falling Treasury yields in response to expected Fed cuts may continue to pressure the USD, while stable oil prices offer limited support to the CAD in the absence of BoC policy shifts.
Market Outlook
Looking ahead, USD/CAD is likely to remain volatile as investors weigh US economic data, Fed policy guidance, and trade-related developments. Market consensus currently favors a September Fed rate cut, reinforcing USD downside risks.
Meanwhile, the BoC is expected to maintain a measured approach, limiting aggressive CAD depreciation and creating a relative outperformance of the Canadian Dollar.
In conclusion, the USD/CAD pair is navigating a landscape defined by dovish Fed expectations, moderate US economic performance, and cautious BoC policy, with key levels around 1.3800 providing critical insight into near-term market sentiment. Traders should remain vigilant for updates on US tariffs, macro releases, and central bank commentary, as these factors are likely to continue shaping the USD/CAD trajectory in the coming sessions.
