USD/CAD edged down to about 1.3735 in Monday’s European session as the US Dollar weakened on reports of ongoing US–Iran talks. The US Dollar Index was down 0.14% at about 99.13.
Iran’s Foreign Ministry said negotiations via Pakistan are still under way, with Tehran focused on ending the war. US President Donald Trump told Fortune that Iran wants a deal.
Market Focus This Week
Canadian markets were closed on Monday for Victoria Day. Markets will watch Canada’s April CPI on Tuesday and the FOMC minutes from the April meeting on Wednesday.
Technically, USD/CAD slipped after failing to hold above the 50% Fibonacci retracement of the 1.3550–1.3967 move at 1.3756. The pair stayed above the 20-day EMA at 1.3696, while the 14-day RSI sat near 56.
Resistance levels are 1.3757, then 1.3807, with further levels at 1.3877 and near 1.3966. Support sits at 1.3708 and 1.3696, then 1.3647 and 1.3549.
Looking back to this time in May 2025, we saw the USD/CAD pair facing resistance near the 1.3755 level, with the market reacting to hopes of a US-Iran deal. At the time, the pair was still showing a slight bullish bias, trading just above its 20-day moving average. This setup was largely driven by short-term geopolitical headlines.
Policy Divergence And Trade Implications
Today, the primary driver has shifted from geopolitical rumors to a clear monetary policy divergence between the Bank of Canada (BoC) and the US Federal Reserve. Recent data shows Canadian inflation has cooled to 2.7%, increasing the likelihood that the BoC will begin cutting interest rates in June or July. In contrast, US inflation remains more stubborn at 3.4%, prompting the Fed to maintain a “higher for longer” stance on interest rates.
This growing interest rate differential makes holding the US dollar more attractive than the Canadian dollar, creating a tailwind for the USD/CAD pair. Derivative traders should view any dips toward the 1.3650 level as potential buying opportunities. The fundamental case for a stronger USD/CAD has grown significantly since the technical-driven environment we observed last year.
Considering this outlook, buying USD/CAD call options with strike prices near 1.3800 for the coming months could be a viable strategy. This allows traders to capitalize on the expected upward trend while defining their maximum risk. The resistance levels noted back in 2025, such as 1.3807 and 1.3877, now serve as credible near-term targets in the current economic climate.
However, we must also consider risks to this outlook, such as a sudden spike in oil prices, which would strengthen the loonie. Traders could hedge long positions by purchasing out-of-the-money put options. This would provide a cushion if unexpected weak US economic data or a surprisingly hawkish BoC statement causes a sharp reversal in the pair.
