USD/CAD climbed to a fresh over-a-year high near 1.4225 in European trading on Wednesday, extending gains above 1.4200 as the US Dollar continued to outperform. The US Dollar Index (DXY) was up 0.1% at about 101.50, its highest level in more than a year, supported by expectations that the Federal Reserve’s next policy move will be a rate rise. CME FedWatch pricing implies an almost 86% chance of a hike this year, while the probability of at least two increases stands at 48.3%. The Fed’s meeting last week showed nine of 19 policymakers backing a hike in 2025, with attention now turning to May US Personal Consumption Expenditure (PCE) price data due on Thursday.
On the charts, USD/CAD was trading around 1.4224 and remained above the 10-week exponential moving average at 1.3943, maintaining a bullish bias. The Relative Strength Index sat near 67, close to overbought conditions, suggesting momentum may be vulnerable to a pause. Support is seen at 1.4140 and then 1.3943, while resistance levels include 1.4296 followed by 1.4415.
Central Bank Divergence and USD/CAD Momentum
We are seeing the USD/CAD pair push higher, trading firmly around 1.3750 after a strong week. This strength is largely coming from the US Dollar’s broad outperformance, with the US Dollar Index (DXY) currently holding strong above the 105.50 level. The current momentum suggests the path of least resistance is to the upside.
The key driver is the growing difference between central bank policies. The Bank of Canada cut its key interest rate to 4.75% earlier this month, while we see the US Federal Reserve holding its rate steady at 5.50%. According to the CME FedWatch tool, traders are now pricing in less than a 50% chance of a Fed rate cut before September, reinforcing the dollar’s yield advantage over the loonie.
Looking ahead, we are focused on the upcoming US Core PCE Price Index data, a key inflation gauge for the Fed. A higher-than-expected inflation reading would likely push back rate cut expectations even further, adding more fuel to the USD/CAD rally. This makes the data release a critical event for positioning in the next couple of weeks.
Options Strategies and Historical Reference Points
Given this bullish outlook, we believe buying call options on USD/CAD is a prudent strategy to capture potential upside. Traders could look at strikes around the 1.3800 level to capitalize on a break of recent highs. This allows for participation in the rally while defining risk to the premium paid.
However, we must also be aware that the rally has been swift, and a short-term pullback is possible. To manage this risk, we can consider buying protective put options or structuring bull call spreads to lower the initial cost. This provides a buffer against any unexpected strength in the Canadian dollar or a sudden dovish shift from the Fed.
We’ve seen this pair run up significantly in the past, such as the rally in 2025 that tested levels above 1.4200. While current conditions are different, that historical price action shows how quickly this pair can move when monetary policies diverge. We will use those past highs as potential long-term reference points for our bullish strategy.
