USD/CAD Price Forecast: Trade tensions to keep Canadian Dollar under pressure

The USD/CAD pair ticks higher to near 1.3863 as US-Canada trade frictions weigh on the Canadian Dollar.
The BoC is expected to leave interest rates unchanged at 2.25% on Wednesday.
Higher US Treasury Yields provide a cushion to the US Dollar.

Sagar Dua FXStreet

The US Dollar (USD) trades slightly higher to near 1.3863 against the Canadian Dollar (CAD) during the European trading session on Tuesday. The Loonie pair remains broadly as ongoing trade tensions between the United States (US) and Canada have put the Canadian Dollar under pressure.

USD/CAD upside seen as trade tensions reinforce loonie’s funding role

According to TD Securities, the latest escalation in US–Canada trade tensions "reinforces the CAD's role as a carry funding currency" and leaves them cautious on the Loonie. In a punchier assessment, TD sums up the backdrop as "elbows up, USD/CAD up," noting that the trade tension escalation between the US and Canada "presents asymmetric upside risk in USD/CAD and reinforces CAD's role as a carry funding currency in the FX market."

This week, investors will pay close attention to the Bank of Canada’s (BoC) monetary policy decision on Wednesday.

BoC seen holding at 2.25% with balance sheet policy unchanged

Analysts at National Bank of Canada expect the BoC to stay firmly on the sidelines at the upcoming decision, noting that "the Bank of Canada is set to leave its overnight target unchanged at 2.25%, a decision widely expected by forecasters and OIS markets." They highlight that such an outcome "would mark the seventh consecutive hold," underscoring the central bank’s steady policy stance, and add that "we don't expect any changes to balance sheet policy," reinforcing the view that the current framework will be maintained.

Meanwhile, surging US Treasury Yields due to rising oil prices in the wake of renewed US-Iran war continue to offer support to the US Dollar.

On the domestic front, investors await the US ISM Manufacturing PMI data for August and the JOLTS Job Openings data for July, which will be published at 14:00 GMT.

USD/CAD Technical Analysis

In the daily chart, USD/CAD trades at 1.3865, maintaining a mildly bearish near-term tone as it holds below the 20-period Exponential Moving Average (EMA) at 1.3896 and the 50.0% Fibonacci retracement at 1.3900. The pair’s inability to reclaim these nearby overhead levels keeps the latest rebound in check, while the Relative Strength Index (14) at 43.5 stays below the neutral 50 line, hinting that upside momentum remains subdued for now.

On the topside, immediate resistance is clustered at the 20-period EMA at 1.3896 and the 50.0% retracement at 1.3900, followed higher by the 38.2% Fibonacci level at 1.3982 and the 23.6% retracement at 1.4084. On the downside, initial support emerges at the 61.8% Fibonacci retracement at 1.3817, ahead of deeper structural levels at the 78.6% retracement at 1.3700 and the prior swing low area aligned with the 100% retracement at 1.3551.

(The technical analysis of this story was written with the help of an AI tool. Know more.)

Economic Indicator

BoC Interest Rate Decision

The Bank of Canada (BoC) announces its interest rate decision at the end of its eight scheduled meetings per year. If the BoC believes inflation will be above target (hawkish), it will raise interest rates in order to bring it down. This is bullish for the CAD since higher interest rates attract greater inflows of foreign capital. Likewise, if the BoC sees inflation falling below target (dovish) it will lower interest rates in order to give the Canadian economy a boost in the hope inflation will rise back up. This is bearish for CAD since it detracts from foreign capital flowing into the country.

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