USD/CAD rose 0.2% to about 1.3772 in the European session on Wednesday, as the Canadian Dollar lagged peers. Expectations for a Bank of Canada rate rise in July eased.
A Deutsche Bank report said the implied probability of a July hike fell to 24% after Canada’s April CPI report. Headline inflation rose to 2.8% year-on-year, below the 3.1% forecast.
Dollar Holds Firm
The US Dollar stayed firm as markets priced in Federal Reserve rate rises this year. The Dollar Index traded near 99.35, edging up but giving back most early gains.
Attention later turns to the Federal Open Market Committee minutes from the April meeting, due at 18:00 GMT. USD/CAD remained above the 20-period EMA at 1.3708, which points to a mild near-term upward bias.
The RSI was near 61. Resistance levels sit at 1.3806, then 1.3876, and 1.3964.
Support is near 1.3710, then 1.3648 and 1.3551. A note said the technical analysis used an AI tool.
Policy Divergence Deepens
Looking back about a year ago, in May 2025, we saw the setup for a stronger USD/CAD as the pair pushed towards 1.3772. The key driver then was weak Canadian inflation data, which lowered the chances of a Bank of Canada rate hike and weakened the loonie. At the same time, the market was expecting the US Federal Reserve to continue hiking, which supported the US dollar.
Today, that policy divergence theme is even more pronounced, keeping the pair elevated around 1.3850. Recent data from Statistics Canada shows headline inflation has cooled further to 2.2% as of April 2026, increasing market bets that the Bank of Canada will be one of the first major central banks to cut its 3.50% policy rate. This puts sustained downward pressure on the Canadian dollar.
Meanwhile, the US Federal Reserve has held its key rate at 4.75% for the last three meetings, and while rate cuts are expected, the timing remains uncertain given resilient US jobs numbers. This difference in central bank outlooks continues to favor holding US dollars over Canadian dollars. The market is effectively rewarding the currency with the higher interest rate that is expected to stay higher for longer.
For derivative traders, this environment supports buying USD/CAD call options expiring in the next two to three months. This strategy allows us to profit from a potential move higher with a defined risk. We should be watching the 1.3964 level, an area of significant resistance back in 2025, as a logical first target for this trade.
Implied volatility has been rising due to uncertainty about when exactly these rate cuts will begin. To manage the higher cost of options, we could use bull call spreads, such as buying a 1.3900 call and selling a 1.4000 call. This cheapens the cost of getting into the bullish trade, though it does cap our potential profit.
On the downside, the old support area around 1.3710 remains a critical level to watch. A break below this would signal that the fundamental story is changing, perhaps due to the Fed signaling faster cuts than anticipated. We could consider buying short-term puts or setting alerts at this level to protect our bullish positions.
