The US Dollar/Canadian Dollar (USD/CAD) currency pair extended its advance for a fifth consecutive day on Tuesday, trading around 1.3913 and hovering near a two-week high as the US Dollar remained firmly supported ahead of the Federal Reserve’s (Fed) monetary policy announcement scheduled for Wednesday [1]. The anticipation of a Fed rate hike has been nearly fully priced in by markets, with the energy shock from the ongoing war in the Middle East complicating the Fed’s efforts to bring inflation back toward its 2% target [1]. Recent US inflation data showed headline Consumer Price Index (CPI) inflation at 3.4% year-over-year in August, while the Producer Price Index (PPI) accelerated to 5.4% [1].
The benchmark 10-year US Treasury yield climbed above 5% on Tuesday, marking its highest level since 2007, as hawkish Fed expectations and elevated Treasury yields continued to support the US Dollar [1]. The US Dollar Index (DXY), which tracks the Greenback against a basket of six major currencies, traded near 99.60, close to a two-week high [1]. Despite rising Oil prices, with West Texas Intermediate (WTI) trading above $100 a barrel—levels last seen on May 21—the Canadian Dollar struggled to capitalize, as the firmer US Dollar and hawkish Fed outlook outweighed the commodity-linked support for the Loonie [1].
The Bank of Canada’s (BoC) steady policy approach has left the interest rate gap tilted in favor of the US Dollar, further limiting the Canadian Dollar’s upside [1]. Strategists at Scotiabank noted that the latest Canadian CPI release was “broadly in line with expectations” and had minimal impact on the CAD or short-term rates, but highlighted that persistent underlying trends in core measures keep the focus on price risks and the potential for the BoC to begin normalizing its accommodative monetary policy later this year [1].
On the technical front, significant resistance for USD/CAD is noted in the low/mid 1.39s, defined by trend resistance, the 40- and 100-day moving averages, retracement resistance, and the early September high. Initial USD support is seen at 1.3825/30 and 1.3730/60 [1]. Market participants are now focused on the Fed’s updated economic projections and comments from Fed Chairman Kevin Warsh, particularly regarding how policymakers assess oil-driven inflation amid ongoing geopolitical tensions [1].
CONCLUSION
USD/CAD remains near a two-week high as markets await the Fed’s policy decision, with a rate hike largely priced in and the US Dollar supported by elevated Treasury yields and hawkish expectations. Rising oil prices offer only limited support to the Canadian Dollar, as the interest rate differential and steady BoC policy keep the Loonie vulnerable. Market attention is now on the Fed’s forward guidance and its assessment of inflation risks.