USD/CAD Outlook: Head and Shoulder Pattern in Play as Fundamentals Provide Interesting Dilemma

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USD/CAD is at a crossroads in many ways and the technicals are showing some interesting patterns. Given that both the Fed and BoC chose to cut rates today could the technicals lead the way in the weeks to come?

There is a possibility that the technicals could dominate for now but moving forward I expect the pace of rate cuts to come into play as well as the performance of Oil prices, which will impact the Canadian Dollar.

Technical Analysis - USD/CAD

Back to the technicals though and following the trendline breakout at the end of July and rally to just above the 1.3900 mark, USD/CAD has been stuck in a range.

We do have the formation of a head and shoulder pattern which has now formed but price is bouncing higher at the time of writing.

Now a break of the neckline at 1.3723 and candle close below could trigger a potential 200-pip selloff and retest of the 1.3500 psychological level.

A bounce from here though will face resistance at the 1.3900 handle before the psychological 1.4000 handle comes into focus.

The 100-day MA is serving as support at present with the daily candle closing back above after a candle closed below the 100-day MA yesterday.

Looking at the RSI and it is hovering below the 50 neutral level, a sign that bearish momentum is leading the way for now.

So will we get a break or bounce?

USD/CAD Daily Chart, September 18, 2025

Source: TradingView.com (click to enlarge)

Fundamental Factors Ahead - Will Rate Differentials and Trade Agreements Play a Role?

The Bank of Canada cut its interest rate by a quarter of a percent today, which was widely expected. They didn't provide much information about what they plan to do in the future. The Bank of Canada's rate is now 2.50%, which is still much lower than the US Federal Reserve's rate is, following the Fed rate cut today.

It makes sense that the Bank of Canada is hesitant to promise more rate cuts right now. However, based on their overall view of the economy and inflation risks, it seems likely that this won't be the final rate cut in this cycle.

However the Fed are still expected to cut rates more aggressively than the BoC over the next 12 months. According to the implied rates updated post FOMC and BoC meetings, markets are pricing in around 134.5 bps of rate cuts through September 2026, while for the BoC markets are only expecting 26.9 bps of cuts.

Source LSEG

This should work in favor of Canadian Dollar strength against the US Dollar in the months ahead.

Of course other factors could come into play such as the performance of Oil prices, tariff developments between the US and Canada including the USMCA renegotiation.

The agreement that is in place is protecting Canada from the worst of US tariffs. If the U.S. threatens to pull out of this deal, it would increase business uncertainty and could hurt the job market even more.

I believe that all the necessary conditions are in place for another interest rate cut in December, and there is even a chance it could happen sooner in October for the BoC.

For now, I see this as the final cut of the cycle, but can't completely rule out more easing at this point, especially given the ongoing risks related to trade.

This is something which could cap Canadian Dollar gains against the US Dollar moving forward. All in all a lot to consider for USD/CAD traders and interesting times ahead.

Client Sentiment Data - USD/CAD

Looking at OANDA client sentiment data and market participants are short on USDCAD with 61% of traders net-short. I prefer to take a contrarian view toward crowd sentiment and thus the fact that so many traders are short means USD/CAD prices could rise in the near-term.

Best of Luck.

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