Canadian Dollar gains traction on fading Fed rate hike bets, US-Canada tariff pause

The Canadian Dollar (CAD) experienced a boost on Thursday as traders discounted expectations of aggressive Federal Reserve (Fed) policy hikes following a decline in US inflation. The US Dollar (USD) weakened against the Canadian Dollar amid this shift, with the USD/CAD pair falling to approximately 1.3790 in early European trading.

Traders will monitor the US Initial Jobless Claims data, released later in the day, as it showed a drop in US Retail Sales in July, marking the first decline in nine months. This, combined with unexpectedly high job losses and subdued inflation, could exert downward pressure on the USD in the coming weeks.

The odds of a Fed rate hike at the September meeting have decreased from 47% a month earlier to 32.7%, according to the CME FedWatch tool. In a surprising move, US President Donald Trump announced a three-day pause on new tariffs on Canadian goods, allowing time for both nations to finalize a trade deal. This decision came just under two hours before tariffs of 50% on nearly $20 billion worth of Canadian imports were set to take effect.

Meanwhile, soaring crude oil prices, triggered by the US-Iran conflict and the uncertainty surrounding the Strait of Hormuz, may provide some support to the oil-export-dependent Canadian Dollar.

BNY strategists highlighted that President Trump has temporarily suspended escalating trade measures against Canada, pausing the scheduled 50% tariffs on certain Canadian imports for three days after trade talks with Canadian Prime Minister Mark Carney. They further noted that a deal between the two countries is reportedly in place, though final documents need to be finalized. The immediate tariff threat has been delayed but not yet removed entirely.

In terms of technical analysis, the USD/CAD pair shows a bearish near-term bias, trading below the 100-day simple moving average (SMA) and the 20-day Bollinger middle band. The currency is only slightly above the lower Bollinger band, with the Relative Strength Index (RSI) at 25.47, indicating oversold conditions. The immediate support is provided by the lower Bollinger band at 1.3788, while a sustained break beneath this level may expose further weakness in the pair.