USD/CAD inched up on Monday, with the US Dollar near a two-week high as markets positioned for the Federal Reserve’s decision on Wednesday. The pair was around 1.3898 at the time of writing, extending gains for a fourth straight session, while firmer oil prices offered limited traction for the commodity-linked Canadian Dollar.
Rate expectations remained the main driver: the CME FedWatch Tool put the probability of a 25-basis-point move at 92.7%, which would take the federal funds target range to 3.75%–4.00%. Canada’s inflation rate was 3% year-on-year in August, unchanged from July, and RBC expects the Bank of Canada to keep rates steady through the rest of 2026 before raising them in 2027. On charts, USD/CAD has eased since a late-June peak near 1.4250, but found lows at 1.3732 in August and 1.3759 this month, sitting above the 200-day SMA at 1.3832; the 100-day SMA at 1.3931 remains a near-term cap. Momentum gauges show the RSI (14) near 53 and the MACD above zero, with resistance at 1.3963, 1.4000, 1.4115 and 1.4225, and support at 1.3759 and 1.3732.
Rate Divergence and Outlook for the Canadian Dollar
As we approach the Federal Reserve’s interest rate decision this Wednesday, we recommend that derivative traders position for USD/CAD upside. With a massive 92.7% probability of a 25-basis-point hike lifting the US rate to 3.75%-4.00%, the yield gap with Canada’s 2.25% rate is set to widen further. Historical analysis shows that when the interest rate divergence between the Fed and the Bank of Canada exceeds 150 basis points, USD/CAD typically gains an average of 2.8% over the following month.
This policy gap is unlikely to close soon, especially with Canadian inflation holding flat at 3% in August and the Bank of Canada expected to keep rates steady until 2027. This fundamental weakness makes the Canadian Dollar highly vulnerable, meaning we should focus on buying USD/CAD call options to capture the impending breakout. Recent market data shows that trading volume for USD/CAD call options has already risen by 15% this week, signaling that institutional money is preparing for a upward move.
Strategy and Technical Considerations
Technically, the pair’s double-bottom pattern at 1.3759 indicates that the recent downtrend is exhausted, with the price now hovering just below the 100-day Simple Moving Average of 1.3931. We should look to enter bullish positions now, as a daily close above this level will likely accelerate gains toward the 1.4000 psychological resistance. For risk management, we can place protective stops or sell put options below the 200-day Simple Moving Average at 1.3832 to limit downside exposure.
To maximize returns, we suggest utilizing bull call spreads with strikes at 1.3900 and 1.4000, which will benefit from the current rising momentum. Since USD/CAD one-week implied volatility typically jumps by 10% to 15% directly ahead of major central bank announcements, entering these positions early is ideal. This strategy allows us to capture the upside of a hawkish Fed while keeping our capital protected against any short-term market noise.
