The Canadian Dollar loses some initial gains against the US Dollar, with USD/CAD trading around 1.3720 after a daily low of 1.3686. This follows a reversal in trade tensions as US President Donald Trump delayed imposing a 50% tariff on EU goods until 9 July.

Friday saw the Canadian Dollar reach a seven-month high after a more robust Retail Sales report for March showed a 0.8% increase, exceeding expectations. This data indicates strong Canadian consumer spending, despite mixed macroeconomic signals.

Canadian Inflation And Rate Projections

The headline inflation in Canada has lessened, yet core inflation remains firm, prompting cautious projections for the Bank of Canada’s June meeting. Despite high inflation and spending, a 32% chance of a 25 basis point rate cut remains priced into markets.

The US Dollar faces pressure, with the Dollar Index at a four-week low, though recent hopes of eased trade tensions offer some relief. Holiday-thinned trading is expected on Monday and attention will shift to upcoming US Fed minutes and Canada’s GDP data later in the week.

This week began with the Canadian Dollar giving back some of its early strength, and we’ve seen USD/CAD edge up again, hovering close to 1.3720. This comes after touching a brief low near 1.3686. The move tracks back to a sudden cooling in trade friction, particularly after Trump decided to delay his proposed 50% tariffs on goods from the European Union. He’s pushed the deadline out to the 9th of July, which removes immediate pressure from global currency markets and offers room for more risk-on positioning in the short term.

On Friday, the CAD climbed to levels it hadn’t seen in seven months. This push followed unexpected strength in Canada’s retail figures—March sales jumped 0.8%, handily beating forecasts and suggesting that consumer activity is holding up well. That’s despite patchy signals elsewhere in the economy. What this tells us is that Canadian households are still spending, even with interest rates where they are.

That said, inflation headlines have eased a touch in recent data, mainly due to lower energy prices. But scratch beneath the surface and the story is more restrained—core inflation, the kind that removes volatile items, has been relatively sticky. This keeps the Bank of Canada walking a fine line. Investors appear to recognise that tension, with current market pricing still assigning nearly a one in three chance of a rate cut in June. Most wouldn’t call that outcome likely, but it’s far from priced out entirely.

Market Reactions And Expectations

Meanwhile, the US Dollar has come under renewed pressure. The Greenback’s broader measure—its index against major peer currencies—has slipped to a four-week low. We’ve seen expectations shift away from further Federal Reserve tightening. However, some pause was provided by the softening US-EU tariff headlines, which eased macro uncertainty and helped limit the Dollar’s decline into the weekend.

With Monday likely seeing lighter trading due to public holidays, direction may not be clear until later in the week. We will be watching for two key events. First, minutes from the most recent Federal Reserve meeting should shed more light on internal debates over future policy moves. Second, Canadian GDP will close out the week, which is where attention will fall if traders want to reassess the BoC outlook going into summer.

For those of us operating in derivatives markets, the current setup demands a measured approach. There’s still room for yield expectations to adjust on both sides of the border. The inflation outlook in Canada is more complicated than the headline suggests, and retail data upside doesn’t automatically translate into sustained economic momentum. On the other hand, the US Dollar’s retreat underlines how quickly sentiment can roll over when expectations shift, particularly in a week shaped by thinner participation.

Pricing on short-term FX vols could offer opportunity if positioned ahead of high-impact data, while rate-sensitive instruments may be sensitive to further hawkish or dovish cues in FOMC communications. It’s less about a major policy reversal and more about reading which scenario appears most convincing to central bankers and, crucially, to markets.

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