USD/CAD Forecast: Is the Canadian Dollar Back in the Game?

The trading week continues to unfold, and the Canadian dollar has begun to show signs of renewed strength in the short term. This can be seen in recent USD/CAD price action, with the pair posting a decline of roughly 0.2% over the last two sessions, allowing the Canadian currency to recover part of the ground lost in previous weeks.

However, this move is still not enough to confirm a consistent shift in market direction. For now, it appears to be driven more by a temporary loss of momentum in the U.S. dollar than by a structural recovery in the Canadian dollar. As a result, a phase of indecision is beginning to develop and could remain relevant for USD/CAD price action over the coming sessions.

Is the USD Beginning to Lose Momentum?

Several sessions have passed since the release of the latest U.S. NFP figures at the end of last week. One of the main consequences of the report was a temporary reduction in expectations for higher interest rates ahead of the Federal Reserve's October meeting.

The slowdown observed in labor market conditions reduced part of the room available for a more aggressive Fed in the short term, a development that is already reflected in monetary-policy probabilities. According to CME Group, markets are currently pricing in more than an 80% probability that interest rates will remain unchanged at the October 28 meeting, keeping the benchmark rate at 4.00%. Expectations of a more patient Federal Reserve have become increasingly evident since the employment data was released.

Source: CMEGROUP

The most visible consequence of this shift in expectations has been a partial loss of momentum in the U.S. dollar. Part of this dynamic is linked to a recent moderation in U.S. Treasury yields, with the 10-year rate moving away from the recent highs observed above 5.3%.

At the same time, this moderation has also started to appear in the behavior of the DXY, the index that measures U.S. dollar strength against its main rivals. After approaching the 102-point area, the index has moved back toward the 101-point zone, reflecting a loss of momentum that coincides with expectations of a less aggressive Federal Reserve in the near term.

Source: TradingEconomics

This dynamic remains particularly important because a moderation in bond yields could also begin to reduce part of the relative attractiveness of U.S. assets. A smaller yield advantage may temporarily slow capital inflows into the United States and limit some of the demand supporting the dollar.

This is precisely the environment that has allowed the Canadian dollar to recover some ground over recent sessions and could continue to support a broader phase of indecision around USD/CAD. However, it is also important to remember that the interest-rate differential continues to favor the United States by a considerable margin. Because of this, the Canadian dollar still carries several weeks of weakness within its medium-term outlook, and any signal suggesting that the Federal Reserve could once again adopt a more aggressive stance may restore strength to the U.S. dollar and could revive the buying pressure that has dominated much of USD/CAD's recent price action.

 

What About the Trade War?

Another factor that remains relevant for the Canadian dollar is the trade relationship between Canada and the United States.

Significant tariff measures continue to remain in place between both countries. The United States maintains tariffs of up to 50% on certain Canadian goods and, since late September, additional restrictions have also been imposed on selected imports. Canada, meanwhile, continues to apply retaliatory tariffs ranging between 15% and 50% on certain U.S. products.

This situation continues to reflect an environment of trade tension that could affect the region's economic outlook over the coming months.

What stands out is that during the G20 trade ministers' meetings held in October, U.S. representatives indicated that several important issues with Canada remain unresolved. This suggests that, at least in the short term, the economic dispute remains far from a definitive resolution and that negotiations continue to progress slowly.

Although this issue has received less attention than central banks and bond markets in recent weeks, it remains an important consideration for Canada due to its heavy dependence on trade with the United States. More than 70% of Canadian exports are destined for the U.S. market and, if trade tensions continue, they could begin to weigh on Canada's growth outlook over the coming months.

For this reason, unless meaningful diplomatic progress begins to emerge, the trade conflict may continue to represent an obstacle to a stronger recovery in the Canadian dollar. Under this scenario, the situation could continue to favor buying pressure around USD/CAD in the weeks ahead.

 

USD/CAD Technical Forecast

Source: StoneX, Tradingview

• The aggressive uptrend is entering a risk zone: USD/CAD price action continues to reflect a dominant bullish bias developed over recent weeks. This dynamic has helped establish a short-term bullish trendline that continues to guide much of the pair's movement. However, the recent bearish corrections are beginning to place that structure under pressure. If buyers fail to regain momentum above key technical barriers, a broader phase of indecision could begin to develop over the coming weeks.
   
• MACD: The MACD histogram continues to show a gradual slowdown and is moving closer to the 0 neutral line. This reading reflects fading momentum within short-term moving averages and supports the possibility of a more consistent phase of neutrality developing around USD/CAD.
   
• RSI: The RSI also continues to flatten in recent sessions, signaling that the dominance of bullish momentum has begun to moderate. Nevertheless, the indicator remains close to the 70 overbought threshold, a situation that continues to highlight the excess buying pressure accumulated in previous weeks and leaves room for additional short-term corrective declines.
   

Key Levels:

• 1.42355 – Key Resistance: The last major barrier observed in recent months and a high not seen since June of this year. Price action that manages to consolidate above this level would not only reinforce the current bullish bias but could also begin to establish a more consistent higher-high structure on the daily chart, opening the door to a broader uptrend.
   
• 1.41564 – Near-Term Barrier: An important retracement level observed several weeks ago that now stands as the closest support area to monitor. This reference could become the primary level to watch if recent bearish corrections continue to extend.
   
• 1.40526 – Critical Support: An important equilibrium zone established during previous weeks that remains the most significant downside barrier within the current structure. Moves toward this level could begin to reflect a more evident loss of direction, place the current uptrend at risk, and open the door to a broader phase of indecision that could eventually evolve into a more established trading range.
   

Written by Julian Pineda, CFA, CMT – Market Analyst

Follow him on: @julianpineda25