The USDCAD currency pair experienced volatility following decisions by the Bank of Canada (BoC) and the Federal Reserve (Fed). Markets are now focused on upcoming economic data to gauge future central bank actions.

The US dollar first weakened but then strengthened after the Fed’s hawkish remarks. The Fed’s projections indicated two rate cuts for 2025, with differing opinions among officials. Fed Chair Powell described the rate cuts as a response to labour market concerns, despite soft non-farm payroll reports.

Interest Rate Expectations

Future data will influence interest rate expectations for the US dollar. Robust economic data could strengthen the greenback; conversely, weak data may have a negative impact. The BoC cut rates by 25 basis points following weak Canadian employment data and signalled a cautious approach, with market expectations largely unchanged.

For USDCAD technical analysis, daily charts revealed a support level at 1.3720. Buyers may enter around this support anticipating a rise to 1.40, while sellers aim for a drop to 1.3540. The 4-hour chart showed a downward trendline, and the 1-hour chart highlighted a support zone at 1.3765.

Upcoming catalysts include US jobless claims figures and Canadian retail sales data, which may influence market movements.

Given the Federal Reserve’s hawkish stance from their recent meeting, we are seeing a clear divergence from the Bank of Canada. The Fed’s dot plot signaled fewer rate cuts than the market expected for the rest of 2025 and 2026, which is propping up the US dollar. This policy split is the main driver for our USDCAD view in the coming weeks.

Economic Resilience and Strategy

We just saw the August CPI report for the US come in hotter than expected at 3.6%, reinforcing the Fed’s cautious approach to further easing. While the last couple of Non-Farm Payroll reports showed some softening, with August’s number coming in at 195,000, this isn’t weak enough to force the Fed’s hand aggressively. Today’s initial jobless claims data, which ticked up slightly to 225,000, confirms a cooling but not collapsing labor market.

On our side, Canadian data justifies the Bank of Canada’s recent rate cut, with the latest August inflation reading showing a continued cooling to 2.7%. This gives the BoC more room to ease policy if needed, especially with the weak employment report we saw earlier this month. The retail sales figures due tomorrow are expected to be soft, which would further weigh on the Canadian dollar.

For traders, this reinforces a bullish outlook on USDCAD, as the US economy appears more resilient. We should consider buying call options with strike prices above the current 1.3765 level, targeting a move towards the 1.40 handle over the next month or two. The key 1.3720 support level provides a clear area to structure trades around, using it as a reference for stop-losses or for initiating positions.

With key data points still on the horizon, we can expect implied volatility to remain supported. Selling out-of-the-money put spreads below the 1.3720 support level could be an effective strategy to collect premium while expressing a bullish-to-neutral view. This takes advantage of the choppy price action while defining our risk if that critical support level breaks.

We have seen this type of policy divergence drive the pair higher for extended periods, as it did back in the 2017-2018 period when the Fed was hiking and the BoC was more hesitant. That historical precedent suggests this trend could have legs, making long-USDCAD positions attractive. The key will be to watch if upcoming US data continues to outperform Canadian figures.

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