USD/CAD stayed near the weekly high around 1.3700 in early European trading on Tuesday, supported by a firmer US Dollar. The US Dollar Index (DXY) rose towards 97.80.
US President Donald Trump warned of higher tariffs if countries do not honour recent trade deals. He referenced a Supreme Court decision that blocked a tariff policy linked to an economic emergency law.
Fed Rate Hold Expectations
Traders still expect the Federal Reserve to keep rates unchanged at its March and April meetings. This has supported demand for the US Dollar.
The Canadian Dollar was steady as oil prices rose on US-Iran tensions. Canada is the largest oil exporter to the US, and higher oil prices can increase foreign inflows.
Markets are also waiting for Canada’s Q4 Gross Domestic Product (GDP) data on Friday. The release may affect near-term pricing in USD/CAD.
USD/CAD was flat near 1.3700 and held above the 20-day Exponential Moving Average (EMA) at 1.3671. A move above the 27 January high of 1.3740 could extend the current rise.
Technical Levels In Focus
The 14-day Relative Strength Index (RSI) stayed within the 40.00 to 60.00 range. This points to limited momentum.
We remember the situation in early 2025, where the focus was on a strong US Dollar and potential tariff threats pushing USD/CAD towards 1.3740. At that time, the market was confident the Federal Reserve would hold rates steady, which gave the greenback significant strength. The entire narrative was driven by US policy expectations.
The situation today is quite different, with the pair trading much lower around 1.3550. The theme has shifted from a universally strong dollar to a divergence in central bank policy between the Fed and the Bank of Canada (BoC). We have since seen the Fed signal a pause, while the BoC remains concerned about domestic inflation.
This view is supported by recent data showing Canada’s annual inflation rate holding stubbornly at 2.9%, keeping pressure on the BoC to not rush into rate cuts. Meanwhile, oil prices have remained firm, with WTI crude trading consistently above $75 a barrel, providing underlying support for the Canadian dollar. This is a stark contrast to the dynamic we saw last year.
For derivatives traders, this means the environment has changed from playing US-driven momentum to trading relative economic strength. With the FX Volatility Index now sitting near a relatively calm 6.5, options are cheaper than they were during the politically charged atmosphere of 2025. This makes strategies like buying USD/CAD put options or establishing bearish put spreads an attractive way to position for potential further downside, targeting a move toward the 1.3400 level seen late last year.
Looking ahead, the key will be to watch the upcoming employment reports from both countries. Any sign of weakness in the US jobs market compared to continued resilience in Canada would accelerate this policy divergence. Therefore, positioning through options allows traders to capitalize on this theme while managing risk ahead of those key data releases.
