Canadian Dollar Forecast: Tariffs aren’t the only risk for USD/CAD traders this week

• Fed decision, Canadian inflation in focus this week
• Fed may shift slightly dovish relative to forecasts three months ago
• USD/CAD caught between downtrend resistance and the 50DMA
• RSI trending lower, MACD rolling over but no confirmation yet

Summary

With a U.S. Federal Reserve interest rate decision and Canadian inflation data on tap, it will be a rare moment when U.S. trade policy isn’t the only focus for USD/CAD traders this week. Despite an uncertain outlook making it difficult to quantify the impact on both economies, the Loonie’s resilience amid a barrage of negative headlines suggests even a continuation of the status quo may not be enough to prevent near-term downside.

FOMC Tops Event Risk

The Fed’s March FOMC decision is the main event for USD/CAD traders and broader markets this week. Markets assign almost zero chance of a rate change from the current 4.25-4.50% range, putting the probability of a 25bp cut at just 2.7%—essentially nada. That shifts the focus to the Fed’s statement, the revised dot plot tracking member rate expectations, and Jerome Powell’s press conference.

Source: TradingView

Heading into the meeting, markets are pricing in three rate cuts by year-end, up from just one a month ago. In contrast, the Fed’s December 2024 projections had two cuts pencilled in. If the Fed delivers an assessment in line with market pricing on this occasion—which is possible given signs of waning economic strength and softer inflation—it could spark another leg lower for the U.S. dollar, particularly if the GDP forecast for 2025 is downgraded. The prior Fed forecasts from December 2024 are found below.

Source: Federal Reserve

Other key U.S. data releases include Monday’s retail sales report for February, housing starts and permits on Tuesday, and jobless claims on Thursday. Markets remain hypersensitive to signs of economic weakness, meaning downside risks for the dollar may be disproportionately large if data undershoots expectations.

In Canada, Tuesday’s inflation report, Thursday’s PPI release, and Friday’s retail sales print are in focus, though their significance has been somewhat diluted by tariff uncertainty and the tax holiday introduced by the Canadian government between December 14 and February 15. Both reports will be noisy when it comes to signal, but the core inflation reading—measured as the average of trimmed mean and median CPI—remains key for identifying underlying trends. Friday’s house price data will also be of interest to see if recent mortgage rate reductions following large-scale Bank of Canada easing are starting to lift prices.

Source: TradingView

 

USD/CAD faces Make-or-Break Moment

Source: TradingView

USD/CAD sits at a potentially important juncture, trapped between downtrend resistance dating back to the January highs and the 50-day moving average below. The latter has been well-respected by traders, making it a critical near-term level.

Given how poorly USD/CAD has traded above 1.4500 recently, directional risks may be skewing lower, particularly with bullish momentum fading. RSI (14) is in a downtrend while MACD is rolling over, though it has yet to confirm a bearish signal. A break below the 50DMA could generate a bearish setup, allowing for shorts to be established beneath the level with a stop above for protection.

If such a scenario plays out, 1.4270 has acted as both support and resistance multiple times over the past three months, making it the first key downside level. Beyond that, the February swing low of 1.4150 comes into focus, followed by 1.4100 and 1.4000 as additional downside targets.

Conversely, if USD/CAD breaks and closes above the January 2025 downtrend, it would challenge the bearish bias, opening the way for potential longs targeting the highs set at the start of March.

-- Written by David Scutt

Follow David on Twitter @scutty