The USD/CAD pair has found its footing following a four-session losing streak, which pushed it to a fresh low of 1.4023—its weakest level since June 18th. This decline was triggered by U.S. inflation data for June falling short of expectations across the board, causing market-implied odds for a July Federal Reserve rate hike to plummet from 35% to 10%. In early Asian trading on Thursday, the currency pair is trading within a narrow range, currently hovering around the 1.4050 level.

On Wednesday, the Bank of Canada opted to keep its benchmark interest rate unchanged at 2.25%, marking the sixth consecutive meeting without a policy shift. Ed Devlin, founder of Devlin Capital, noted that this decision was unsurprising, as central banks typically adopt a wait-and-see approach during periods of heightened uncertainty.

Devlin pointed out that the central bank's economic forecasts continue to face challenges due to volatility in Canada's trade relationship with the United States, the war in Iran, persistent inflation concerns, and other economic and geopolitical factors.

The Bank's newly released Monetary Policy Report anticipates an improvement in the Canadian economy in the coming months, following a year and a half of sluggish growth. However, it reiterated that ongoing uncertainties pose a threat to this outlook.

Central Bank Prepared to Act, Direction Hinges on Data Trends

Devlin commented that, given the economy's weakness, the central bank has performed reasonably well by cutting rates at a relatively fast pace before this current series of pauses. He posed the critical question: "Do we need more stimulus? Or will persistent energy and food inflation seep into core inflation and de-anchor inflation expectations? I think if that happens, especially given the post-pandemic high inflation experience, the central bank absolutely does not want to see that."

Devlin stated that the Bank is weighing all these factors before deciding whether to act by raising or lowering rates in the future. "I think they are prepared to move in either direction, just waiting for the data trend to act if necessary."

Oil Prices and Inflation: Longer the Conflict, Greater the Risk

Statistics Canada reported last month that headline inflation in May jumped above 3% for the first time in over two years, primarily driven by rising gasoline prices linked to the war in Iran.

While experts at the time suggested this data did not signal a broad-based inflation resurgence, Bank of Canada Governor Tiff Macklem, in prepared remarks on Wednesday, warned that the longer the conflict persists, the greater the risk of inflation concerns spreading to other parts of the economy.

Macklem stated, "We have been looking through the direct effect of higher oil prices on inflation, but the longer oil prices remain elevated, the greater the risk they spill over into other goods and services. As we have said before, we will not allow the increase in oil prices to turn into persistent inflation."

Persistent Trade Uncertainty Weighs, Strategists Bet on Status Quo for the Year

Devlin highlighted that the uncertain trade and economic relationship between Canada and the United States continues to weigh on the economy, with Ottawa and Washington yet to reach a new trade agreement after months of on-and-off negotiations.

"I think the Bank of Canada will not have a policy change for the remainder of 2026. The market is currently pricing in one rate hike from Canada this year; I'm betting the opposite—I think they likely stay on hold," Devlin said.

Institutional Perspectives

Mitsubishi UFJ Financial Group noted in its July foreign exchange outlook report that it expects the Canadian dollar to find support as the U.S. Dollar Index gradually retreats.

The institution forecasts the USD/CAD pair to fall to 1.4000 by the end of Q3 2026, drop further to 1.3800 in Q4, and reach 1.3600 and 1.3500 in Q1 and Q2 2027, respectively. The rationale includes a weaker U.S. dollar following a stabilization in Fed policy, a gradual recovery in the Canadian economy, and commodity support for the CAD from oil prices. Despite short-term pressure from the U.S.-Canada interest rate differential and trade uncertainty, the Canadian dollar has room for appreciation in the medium to long term.

Canadian Imperial Bank of Commerce's July forecast adjusted its Q4 target for USD/CAD to 1.3700. The bank noted that previous Canadian dollar weakness stemmed primarily from U.S. dollar strength rather than a deterioration in Canada's fundamentals. Pressure from U.S. core inflation and potential Fed tightening contrasts with the BoC's cautious policy, keeping short-term rate differentials a burden. However, with progress in trade negotiations and stabilization in Canadian data, the Canadian dollar is expected to gradually strengthen into the 1.3300-1.3600 range in 2027.

Desjardins' latest foreign exchange analysis suggests that from a medium-to-long-term perspective, a potential shift towards Fed easing in 2027 and a narrowing interest rate differential would support a stronger Canadian dollar, targeting 1.3500.

Desjardins cautioned that inflation data and trade policy are key variables. Stubborn U.S. inflation would maintain pressure on the CAD, while a moderation could present a rebound opportunity.

Technical Analysis

The current price of USD/CAD has fallen below the short-term 20-day moving average (MA20) at 1.4168 but remains above the 50-day (MA50), 100-day (MA100), and 200-day (MA200) moving averages. The broader long-term uptrend has not been completely reversed, with the pair entering a short-term corrective phase.

On the indicator front, the MACD is above the zero line, but the DIFF line (0.0025) has turned down below the DEA line (0.0056), forming a bearish crossover and generating green histogram bars, indicating a clear weakening of bullish momentum. The RSI reading is at 43.08, having moved out of overbought territory, suggesting a short-term release of selling pressure.

In terms of price structure, 1.4247 acts as a strong resistance level for the current phase. The MA20 at 1.4168 has now turned into short-term resistance, while the 1.4000 psychological level is a key support for this pullback. A decisive break below 1.4000 could see the pair extend its decline towards the MA50 area around 1.3977. If support holds above 1.4000, the exchange rate retains the potential to rebound towards higher levels.

Overall Assessment: Wait-and-See Mode Persists, Inflation Risk Remains Key Variable

In summary, the Bank of Canada's decision to hold rates steady for a sixth consecutive time aligns with market expectations.

The central bank maintains a cautious stance, balancing economic weakness against inflation risks. Governor Macklem has explicitly stated the Bank's intention to prevent oil price increases from morphing into persistent inflation. While markets are pricing in one rate hike this year, Devlin is betting on no change, believing trade uncertainty and volatile economic data will keep the central bank patient.

The future policy direction will depend on whether signs emerge that core inflation is broadening due to elevated energy prices, as well as the progress in U.S.-Canada trade negotiations.

As of the latest update, the USD/CAD pair is quoted at 1.4050/51.