Insights 
VT 
USD/CAD remains steady with divergent paths of the Federal Reserve and Bank of Canada on the horizon. The US Consumer Price Index report revealed softer inflation, setting the stage for potential Fed rate cuts.
Currently, the US Dollar trades at 1.3998, up 0.17% against CAD, driven by policy divergence and commodity-linked pressures. April’s CPI showed a 0.2% rise, below forecasts, while annual inflation dipped to 2.3%.
Core Inflation And Interest Rates
Core inflation held at 2.8% yearly, aligning with predictions. Softer inflation data increased expectations for Fed policy easing this year, with markets anticipating a possible rate cut by September.
Traders will monitor comments from Fed officials and the Bank of Canada’s domestic challenges, as inflation trends lower. Nearly 60% predict a BoC rate cut at its next meeting, while the widening policy gap with the Fed influences USD/CAD movements.
Oil price volatility further impacts the Canadian Dollar, with USD/CAD testing resistance around 1.4000. Failure to breach the 200-day SMA at 1.4020 suggests key resistance, while support lies around 1.3940, shaped by the 61.8% Fibonacci retracement level.
With inflation in the US slipping beneath previous forecasts, and headline CPI moderating to 2.3% year-on-year, it’s clear there’s downward pressure building subtly but persistently. Core CPI, which excludes food and energy and tends to be the better gauge for underlying price trends, remains steady at 2.8%. That figure meeting expectations steadies nerves, but the gentler monthly uptick of just 0.2% has triggered notable movement in interest rate expectations.
From our standpoint, what stands out most is the timeline being adjusted. The shift in market outlook now places a high probability—well above the 50% threshold—on easing by September from the Federal Reserve. Dovish sentiment is gaining traction. Powell’s team, while still observing the data vigilantly, now finds itself under growing pressure to act if this disinflationary pattern persists into the summer.
Canadian Policy Outlook
Meanwhile, north of the border, things are starting to diverge more sharply. With economic growth lagging and inflation easing more consistently, odds are narrowing in on a rate cut at the next BoC meeting. Macklem and his colleagues have less headroom than before—the domestic economy doesn’t seem to justify a prolonged hold on rates, particularly with soft consumer demand and a housing market that appears to be treading water.
Looking at the pair technically, price action approaching the 1.4000 mark has become more reactive. Resistance near the 1.4020 line, where the 200-day simple moving average is parked, hasn’t cracked yet. Instead, this area is becoming a bit of a ceiling for now. Price may consolidate between that and support down at 1.3940, marked by the 61.8% Fibonacci retracement level—key for decision points.
Short-term options are starting to reflect this balance. Implied volatility remains moderate, but risk reversals have started to tilt ever so slightly towards USD call premiums. That suggests there’s a defensive bias, with some positioning for a continued US Dollar bid in the event of a surprise hawkish pushback from Fed speakers or renewed pressure from oil.
Oil, of course, brings its own kind of unpredictability to this picture. Canadian Dollar performance has been anything but isolated—crude’s shaky recovery is dragging CAD sensitivity in tow. If prices struggle to maintain momentum, especially with concerns around Chinese demand resurfacing, that will only add to downward strain on CAD from the divergence in monetary policy.
In positioning, we need to accept that directionality near-term hinges as much on policy comments as raw economic releases. Any fresh confirmation—or contradiction—of easing timelines will feed into directional bias on USD/CAD. We ought to stay light on duration while monitoring not just headline CPI data, but also second-tier indicators like US PCE and Canadian GDP, which may act as early signals for shifts in tone.
Pricing around the overnight indexed swaps curve reflects the wider view: traders are expecting looser Canadian policy much sooner and possibly by a wider margin. This growing gap, if confirmed in speeches or dot plot commentary, is likely to reinforce upside tests on USD/CAD even without a major breakout.
We’re now approaching a period in which reaction to central bank discourse may outweigh fundamentals just for a stretch. Watches are now set for how conviction in these easing trajectories will harden—or fray—in the next few weeks.
