- USD/CAD weakens as the Fed’s April Beige Book underscores the potential negative impact of tariffs on the economic outlook.
- The US Dollar also loses ground after the flash Composite PMI pointed to a slowdown in overall business activity.
- President Trump suggested the 25% tariff on Canadian auto imports to the US could be raised.
USD/CAD edges lower around 1.3870 during Thursday's Asian session, after climbing roughly 0.50% in the previous day. The pair is under pressure as the US Dollar (USD) weakens following the Federal Reserve’s April Beige Book, which pointed to deteriorating economic conditions.
The report highlighted growing concerns about tariffs, which have negatively impacted the economic outlook across multiple US regions. Consumer spending appeared uneven, and labor market conditions softened, with many districts noting stagnant or slightly declining employment.
Further pressuring the Greenback were Wednesday’s mixed S&P Global PMI figures. The flash Composite PMI for April fell to 51.2 from 53.5, signaling a slowdown in business activity. While the Manufacturing PMI ticked up slightly to 50.7, the Services PMI dropped sharply to 51.4 from 54.4, reflecting weaker demand in the services sector. Chris Williamson of S&P Global noted that growth momentum is waning, with persistent inflation complicating the Fed’s policy outlook.
However, the USD/CAD pair appreciated on Wednesday as the Canadian Dollar (CAD) remained under pressure. This came after US President Donald Trump suggested that a 25% tariff on Canadian auto imports to the US could be increased. Trump emphasized efforts to strike a deal with Canada, aiming to boost US auto production and reduce reliance on foreign vehicles, according to Reuters.
Meanwhile, the Canadian Dollar (CAD) also struggles due to the International Monetary Fund’s (IMF) downward revision of Canada’s 2025 GDP growth forecast to 1.4% has renewed concerns about weakening domestic demand, Additionally, the Bank of Canada’s (BoC) decision to keep its benchmark interest rate steady at 2.75% underscores a cautious stance, influenced in part by ongoing uncertainty surrounding potential US tariffs.
Canadian Dollar FAQs
The key factors driving the Canadian Dollar (CAD) are the level of interest rates set by the Bank of Canada (BoC), the price of Oil, Canada’s largest export, the health of its economy, inflation and the Trade Balance, which is the difference between the value of Canada’s exports versus its imports. Other factors include market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – with risk-on being CAD-positive. As its largest trading partner, the health of the US economy is also a key factor influencing the Canadian Dollar.
The Bank of Canada (BoC) has a significant influence on the Canadian Dollar by setting the level of interest rates that banks can lend to one another. This influences the level of interest rates for everyone. The main goal of the BoC is to maintain inflation at 1-3% by adjusting interest rates up or down. Relatively higher interest rates tend to be positive for the CAD. The Bank of Canada can also use quantitative easing and tightening to influence credit conditions, with the former CAD-negative and the latter CAD-positive.
The price of Oil is a key factor impacting the value of the Canadian Dollar. Petroleum is Canada’s biggest export, so Oil price tends to have an immediate impact on the CAD value. Generally, if Oil price rises CAD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Oil falls. Higher Oil prices also tend to result in a greater likelihood of a positive Trade Balance, which is also supportive of the CAD.
While inflation had always traditionally been thought of as a negative factor for a currency since it lowers the value of money, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Higher inflation tends to lead central banks to put up interest rates which attracts more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in Canada’s case is the Canadian Dollar.
Macroeconomic data releases gauge the health of the economy and can have an impact on the Canadian Dollar. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the CAD. A strong economy is good for the Canadian Dollar. Not only does it attract more foreign investment but it may encourage the Bank of Canada to put up interest rates, leading to a stronger currency. If economic data is weak, however, the CAD is likely to fall.
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.
If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.
FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.
The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.
Recommended content
Editors’ Picks
EUR/USD holds above 1.1300 despite weak EU PMI data
EUR/USD stays in a tight daily range above 1.1300 in the European session on Thursday. The PMI data from Germany and the Eurozone showed that the business activity in the private sector contracted in May, limiting the Euro's gains. Market focus shifts to US PMI data.
GBP/USD clings to minor gains above 1.3400 ahead of US PMI data
GBP/USD defends minor bids while trading above 1.3400 in the European session on Thursday. The data from the UK showed that S&P Global Composite PMI improved to 49.4 in May's flash estimate from 48.5 in April. Focus shifts to US PMI reports.
Gold price retreats further from two-week high; $3,300 mark holds the key for bulls
Gold price extends its steady intraday retracement slide from a nearly two-week high touched earlier this Thursday and slides to the lower end of its daily range during the first half of the European session. The pullback lacks any fundamental catalyst and is more likely to remain limited amid a combination of supporting factors.
Chainlink Price Forecast: LINK targets $25 amid rising whale activity
Chainlink records a nearly 2% increase on Thursday, fuelled by the increased capital flow and risk-on sentiment. Whale activity in Chainlink has increased with 25 million LINK tokens added to their holdings since February.
FOMO vs fundamentals: Retail buys the dip, institutional investors stay cautious
Retail optimism is rising, but institutions are still treading carefully amid lingering macro and earnings risks. Policy and fiscal uncertainty remain elevated, with trade tensions, U.S. debt concerns, and a cautious Fed dominating the backdrop.
The Best brokers to trade EUR/USD
SPONSORED Discover the top brokers for trading EUR/USD in 2025. Our list features brokers with competitive spreads, fast execution, and powerful platforms. Whether you're a beginner or an expert, find the right partner to navigate the dynamic Forex market.