USD/CAD Forecast: Canadian Dollar Remains Under Pressure Amid Trade Tensions

The start of the trading week has not been particularly favorable for the Canadian dollar. Over the last two trading sessions, USD/CAD has gained more than 0.6% in favor of the U.S. dollar, reflecting a loss of momentum for the CAD in the short term. For now, this dynamic is being driven both by the recent stabilization of the U.S. dollar and by growing uncertainty surrounding the future of trade relations between the United States and Canada. As long as these concerns remain in place, the market could enter a more pronounced period of indecision around USD/CAD price action in the coming trading sessions.

How Is the Trade Situation Between Canada and the United States Evolving?

Recent trading sessions have been particularly important for Canada, as negotiations aimed at preventing the implementation of 50% tariffs on approximately $20 billion worth of Canadian goods failed to reach an agreement before the deadline expired on August 21. As a result, the new tariffs have come into effect and are now becoming part of Canada's economic landscape.

The most important aspect of this development is that Canada appears to have shifted from a negotiation strategy toward direct trade retaliation. During today's session, the Canadian government released an official list of countermeasures against the United States and, in theory, beginning on September 8, tariffs of up to 50% will be imposed on a range of U.S. products valued at approximately CAD 27 billion. In addition, Prime Minister Mark Carney stated that negotiations with the United States remain suspended until further notice.

This situation may be increasing the trade uncertainty premium surrounding the Canadian dollar. Without a clear path toward renewed negotiations, markets could begin to price in the possibility of a more prolonged trade dispute. This scenario is particularly sensitive for Canada given its strong trade dependence on the United States, which receives nearly 70% of the country's merchandise exports. The combination of active tariffs, suspended negotiations, and confirmed retaliatory measures could increase concerns about economic growth and investor confidence in Canadian dollar-denominated assets.

More broadly, recent developments suggest that the market may be entering a period of heightened trade tensions. If this situation persists, the Canadian dollar could continue facing challenges in establishing a sustained recovery, reinforcing a more uncertain backdrop for USD/CAD over the coming weeks.

Is the U.S. Dollar Beginning to Find Stability?

Another factor influencing USD/CAD is the recent stabilization seen in the U.S. dollar. This dynamic may reflect both a pause after several weeks of weakness and growing expectations ahead of the release of the PCE inflation report and the events scheduled for Jackson Hole later this week.

These developments could provide clearer signals regarding the Federal Reserve's policy outlook over the coming months. In particular, investors continue to assess whether policymakers could signal a more hawkish stance, a scenario that would typically support the relative attractiveness of U.S. dollar-denominated assets.

This stabilization is already visible in the behavior of the DXY Index, which measures the strength of the U.S. dollar against its major peers. After several weeks of declines, the index has managed to stabilize around the 99-point area. Although there is not yet clear evidence of a broad recovery in dollar demand, the selling pressure that dominated previous weeks appears to be easing. For now, markets seem to be adopting a wait-and-see approach as they await fresh economic data and additional guidance from the Federal Reserve.

Source: TradingEconomics

This development remains important because a stable U.S. dollar could limit the Canadian dollar's ability to extend recent gains. Furthermore, if upcoming economic events reinforce expectations of a more aggressive Federal Reserve, a more consistent recovery in DXY could begin reversing part of the strength the CAD had accumulated over recent weeks. Under that scenario, bullish pressure on USD/CAD could become increasingly relevant in the sessions ahead.

USD/CAD Technical Outlook

Source: StoneX, Tradingview

• The Emerging Downtrend Continues to Hold: Despite the recent recovery in USD/CAD, the dominant technical structure remains the bearish trendline that has developed over recent weeks. So far, the rebound has not been strong enough to threaten this formation, meaning it continues to be the most important technical reference on the chart. Unless buying pressure becomes more established, the bearish trend is likely to remain the dominant feature of the medium-term outlook.
   
• RSI: The indicator remains below the neutral 50 level, suggesting that momentum continues to favor sellers. However, the recent recovery in the RSI could also be signaling a gradual slowdown in the bearish pressure that characterized previous weeks.
   
• MACD: The histogram is gradually approaching the neutral 0 level. This behavior suggests a growing balance within the average strength of short-term moving averages and could potentially be signaling a period of greater indecision if the trend continues to develop in upcoming sessions.
   

Key Levels to Watch:

• 1.39343 – Key Resistance: This area represents a recent equilibrium zone and aligns with the medium-term bearish trendline. Sustained price action above this level could place the dominant bearish structure at risk, signal a broader shift in market structure, and create room for a more meaningful bullish bias over the coming weeks.
   
• 1.38475 – Nearby Barrier: This level coincides with the 200-period Simple Moving Average and sits close to the 61.8% Fibonacci retracement level. As long as the price continues to trade near this area, the lack of direction could become increasingly evident and support a more pronounced phase of indecision on the chart.
   
• 1.37612 – Critical Support: This level corresponds to recent lows and remains the most important downside barrier on the chart. A sustained break below this area would reinforce seller control and could pave the way for a broader extension of the bearish trend in USD/CAD during the weeks ahead.
   

Written by Julian Pineda, CFA, CMT – Market Analyst

Follow him on: @julianpineda25