USD/CAD Price Forecast: Gains ground to near 1.4100, holding bullish bias above 100-day SMA
- USD/CAD posts modest gains near 1.4100 in Thursday’s early European session.
- Traders now see a nearly 69.7% chance of another increase when the Fed next meets in October.
- The constructive view of the pair prevails above the 100-day SMA, with bullish RSI momentum.
- The first upside target to watch is 1.4115; the initial support level emerges at 1.3960.
The USD/CAD pair trades in positive territory around 1.4100 during the early European trading hours on Thursday. The US Dollar (USD) edges higher against the Canadian Dollar (CAD) as stronger US Manufacturing Purchasing Managers Index (PMI) data reignited inflation fears and reinforced US rate-hike bets. Traders will take more cues from the Fedspeak later in the day.
According to the US S&P Global flash PMI released on Wednesday, the Composite PMI climbed to 58.4 in September from 56.0 in August. Additionally, the Manufacturing PMI rose to 57.0 in September, versus 53.9 prior, above the market consensus of 53.5. The Services PMI improved to 58.7 in September, compared to 56.5 in August, better than the forecast of 56.0.
"Given the relative strength of US growth and increasingly aggressive Fed rate-hike pricing, the US dollar continues to stand firm in its attraction to own," said Chris Weston, head of research at Pepperstone.
Markets are now pricing in roughly a 69.7% odds that the US Federal Reserve (Fed) would hike rates by a quarter percentage point in October, up from 48.7% one week ago, according to the CME FedWatch tool.
Meanwhile, crude oil prices fall amid hopes for diplomatic progress between the US and Iran. Iran said on Wednesday that it remained open to diplomacy to end the US-Iran conflicts, though the two countries remain far apart on ways to do so, per Reuters. It is worth noting that Canada is a major oil-exporting country, and low crude oil prices generally have a negative impact on the CAD.
BoC tone unchanged as Macklem keeps door open to tighter policy
Strategists at Scotiabank note that BoC Governor Tiff Macklem’s latest remarks left the policy narrative largely intact, with “comments yesterday [that] did not advance the interest rate debate to any degree.” According to the bank, his guidance was “broadly consistent with the tone of the latest policy statement which balanced trade tensions against sticky price pressures,” reinforcing the sense of continuity in the BoC’s communication.
Scotiabank adds that “the door to tighter policy remains open but we may have to wait for the October policy decision to get a clearer sense of the rate outlook.” While they acknowledge that “a lower CAD will add to inflation risk at the margin,” they also stress that “CAD losses since early September have not been all that significant and the Bank generally views the FX pass through (to inflation) as lagging and limited.” Together, these points suggest policymakers remain alert to currency-driven price pressures but are in no rush to signal a decisive shift ahead of the next meeting.
Fed’s Barr flags more hikes as inflation risks rise, supporting Dollar upside
Fed’s Barr delivered a notably hawkish message, with an FXS Speechtracker score of 8/10, stronger relative to the historical average of 7/10. The emphasis that “further rate hikes [are] likely needed” and that risks to achieving 2% inflation have increased, while labor market risks have receded, underscores a clear bias toward tighter policy and supports Dollar strength. Acknowledging that the Fed was “out of position” and needed to recalibrate policy, alongside strong growth and a solid labor market, reinforces the narrative that the policy stance may still be too loose for the inflation objective.
The FXS Fed Sentiment Index rose by 0.42 points to 148.81, signaling a modest but meaningful hawkish shift in aggregate Fed communication. With the index well above the neutral 100 mark, this speech contributes to keeping the Fed firmly in hawkish territory, aligning with the elevated FXS Speechtracker score and underpinning expectations for further policy tightening.
Technical Analysis: USD/CAD retains a positive outlook above the 100-day SMA
In the daily chart, USD/CAD maintains a bullish near-term bias as price holds above the 100-day Moving Average (MA) and the Bollinger Bands 20-period middle simple moving average (SMA). The pair is now pressing toward the upper Bollinger band, while the Relative Strength Index (14) near 69 suggests strong but increasingly stretched upside momentum, hinting that the advance could be vulnerable to consolidation or a minor pullback.
On the topside, immediate resistance level is located at the Bollinger upper band at 1.4115. A sustained break above this ceiling likely to extend the bullish phase to the June 24 high of 1.4248.
On the downside, initial support is seen at the 100-day MA at 1.3960, followed by the Bollinger middle band at 1.3915. A deeper weakness would expose the lower Bollinger band support around 1.3715.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
Canadian Dollar FAQs
The key factors driving the Canadian Dollar (CAD) are the level of interest rates set by the Bank of Canada (BoC), the price of Oil, Canada’s largest export, the health of its economy, inflation and the Trade Balance, which is the difference between the value of Canada’s exports versus its imports. Other factors include market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – with risk-on being CAD-positive. As its largest trading partner, the health of the US economy is also a key factor influencing the Canadian Dollar.
The Bank of Canada (BoC) has a significant influence on the Canadian Dollar by setting the level of interest rates that banks can lend to one another. This influences the level of interest rates for everyone. The main goal of the BoC is to maintain inflation at 1-3% by adjusting interest rates up or down. Relatively higher interest rates tend to be positive for the CAD. The Bank of Canada can also use quantitative easing and tightening to influence credit conditions, with the former CAD-negative and the latter CAD-positive.
The price of Oil is a key factor impacting the value of the Canadian Dollar. Petroleum is Canada’s biggest export, so Oil price tends to have an immediate impact on the CAD value. Generally, if Oil price rises CAD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Oil falls. Higher Oil prices also tend to result in a greater likelihood of a positive Trade Balance, which is also supportive of the CAD.
While inflation had always traditionally been thought of as a negative factor for a currency since it lowers the value of money, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Higher inflation tends to lead central banks to put up interest rates which attracts more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in Canada’s case is the Canadian Dollar.
Macroeconomic data releases gauge the health of the economy and can have an impact on the Canadian Dollar. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the CAD. A strong economy is good for the Canadian Dollar. Not only does it attract more foreign investment but it may encourage the Bank of Canada to put up interest rates, leading to a stronger currency. If economic data is weak, however, the CAD is likely to fall.