USD/CAD slipped to about 1.4190 in early European trade on Friday as the US Dollar eased against the Canadian Dollar after US PCE inflation tempered expectations for further Federal Reserve tightening. The headline PCE Price Index rose 4.1% year on year in May, the first reading above 4.0% since April 2023, while the monthly gain came in at 0.4% versus a 0.5% consensus. The University of Michigan Consumer Sentiment Index is due later in the session.
Rate markets adjusted accordingly, with the CME FedWatch tool implying a 28.9% probability of a Fed hike in July, down from 34.2% previously. In Canada, the Bank of Canada is expected to keep rates unchanged for the rest of the year, and its meeting minutes reinforced a stance of policy flexibility in response to potential US trade restrictions and energy-price moves. Separately, Reuters reported pricing for 17 basis points of BoC tightening by December, down from about 60 bps last month, even as the central bank retains an inflation objective of 1–3%.
Immediate Market Reaction And US Dollar Pressure
Given the conflicting signals, we see the recent drop in USD/CAD towards 1.4190 as a short-term reaction to US inflation data. The market is scaling back expectations for a July Fed rate hike, with the CME FedWatch tool now showing less than a 30% chance. This immediate pressure on the US dollar is the dominant theme today, June 26, 2026.
Medium-Term Outlook For USD/CAD
However, we believe the headwinds for the Canadian dollar are more significant in the coming weeks. The recent peace deal has sent WTI crude futures tumbling to $78.50 a barrel, a level not seen since early 2025. This fundamentally weakens the terms of trade for Canada and puts a cap on the Loonie’s strength.
The Bank of Canada’s dovish pivot further supports a weaker CAD. Statistics Canada recently reported that GDP contracted by 0.1% in April, giving the central bank reason to pause its tightening cycle indefinitely. This explains why traders now only expect 17 basis points of tightening by December, a sharp drop from last month.
This creates a widening policy divergence, where the Fed remains tighter for longer than the BoC. Historically, a widening US-Canada interest rate spread has consistently put upward pressure on the USD/CAD pair, a pattern we observed throughout the 2022-2024 hiking cycle. We expect this historical relationship to reassert itself once the market digests the latest US PCE report.
Therefore, we would view the current dip in USD/CAD as an opportunity to position for a move higher. We are looking at buying out-of-the-money call options on USD/CAD with expirations in late July or August. This strategy allows us to profit from a potential rebound while limiting our downside risk if US dollar weakness persists.
We will be closely watching the upcoming Michigan Consumer Sentiment report, which recently posted a slightly better-than-expected 98.5, and Canada’s next Labour Force Survey. Any further signs of a cooling Canadian economy will reinforce our view that the path of least resistance for USD/CAD is higher.
