USD/CAD Forecast: Canadian dollar loses ground after CPI release

The trading week has not been entirely favorable for the Canadian dollar in the short term, as USD/CAD has shown upward strength over the last three sessions, with a gain of around 0.3%. This indicates that US dollar strength is becoming increasingly present in the pair’s recent price action. For now, buying pressure has managed to hold despite the release of Canadian CPI data, mainly because the strength of US Treasury bonds continues to support the US dollar. If this catalyst remains in place, buying pressure around USD/CAD could continue to be relevant in the coming sessions.

Inflation data takes center stage

During today’s session, inflation data was released in Canada, where CPI y/y came in below expectations. The market had anticipated a reading of 3.1%, but the official figure remained at 2.8% for April, meaning that, initially, no relevant short-term inflationary pressure was observed.

Source: FXSTREET

The key point to consider with this figure is that, although inflation has continued to rise consistently in recent months —considering that the figure stood at 1.8% in February— the acceleration in inflation is not as strong as expected in Canada. While the data still shows a consistent increase, it remains below the upper limit of the Bank of Canada’s inflation target, which stands around the 3.00% area. Therefore, for now, it does not yet reflect an inflation problem that appears to be getting out of control in this scenario.

Source: TradingEconomics

With this information in mind, it is important to remember that, during its latest decision, the Bank of Canada decided to keep interest rates unchanged at 2.25% and mentioned that, as long as inflation data does not get out of control, there is no immediate need to move toward a fully restrictive monetary policy stance. Therefore, as recent consumer price index data has come in below expectations, this tends to reinforce a scenario in which the Bank of Canada could remain in a neutral position, with no major changes in interest rates in the upcoming decisions.

This dynamic becomes relevant considering that the current Bank of Canada rate remains below the Federal Reserve’s benchmark rate, which stands at 3.75%. In the case of the United States, the monetary policy outlook has even shifted toward the possibility of a rate hike by the end of the year. If this is combined with a calmer Bank of Canada and no relevant changes in rates, the differential could eventually widen, which does not favor the strength or attractiveness of investments denominated in Canadian dollars.

In fact, this dynamic can be seen in the behavior of the bond markets in both regions. Now, the yield on US 10-year Treasury bonds has posted a 1.66% increase during the session, while Canada’s has only risen 0.57%. This shows that US bonds are reacting more strongly to the macroeconomic dynamics of both economies. It also stands out that US 10-year bonds are currently yielding close to 4.7%, compared with Canadian bonds, which remain near 3.7%. Therefore, if US yields continue to rise and offer a more attractive return than the Canadian bond market, this could activate stronger appetite for US dollar-denominated securities, making it more difficult for the Canadian dollar to recover ground in the short term.

Source: TradingEconomics

Considering this environment, the inflation data released in Canada reinforced a neutral outlook for the Bank of Canada, which has prevented the Canadian bond market from growing at the same pace as the US bond market. If this dynamic remains in place, it could represent a relevant source of buying pressure for USD/CAD in the short term.

 

Technical outlook for USD/CAD

Source: StoneX, Tradingview

• The broad sideways range remains intact: Despite the recent recovery in USD/CAD, buying pressure has still not been strong enough to break the sideways range that remains between the ceiling around 1.39215 and the floor near 1.35418. For this reason, if price continues to move within this area, it may be difficult to see the formation of a more relevant directional move that could dominate price action over the coming weeks. In this context, the sideways range remains the most important technical factor to watch in the coming sessions.
   
• RSI: Looking at the RSI, the indicator line continues to move consistently above the 50 level, suggesting that the average momentum over the last 14 sessions still shows a relevant bullish tilt. If this behavior continues, buying pressure could remain important in the short term.
   
• MACD: A similar scenario can be seen in the MACD, as the histogram remains above the neutral 0 level. This suggests that the average strength of short-term moving averages continues to show a bullish bias, which could remain relevant in USD/CAD price action over the coming sessions.
   

Key levels:

• 1.39215 – Relevant resistance: An important high level that corresponds to the ceiling of the broad sideways range, the area marked by a previous long-term bearish trendline, and a zone located above the 50- and 200-period moving averages. Price movements toward this level would begin to reflect a more consistent buying bias, which could put the current range at risk and even open the door to a more stable bullish trendline in the coming weeks.
   
• 1.37227 – Near-term barrier: A neutral zone that coincides with the 50-period simple moving average. Price movements that remain close to this level could continue to highlight a phase of consistent indecision and reinforce the importance of the sideways range that continues to dominate USD/CAD in the short term.
   
• 1.35418 – Crucial support: A level corresponding to the 2026 lows and the main downside barrier. A break below this zone could reaffirm the dominance of the selling bias and support the continuation of the long-term downtrend as the dominant technical pattern.
   

Written by Julian Pineda, CFA, CMT – Market Analyst

Follow him on: @julianpineda25