USD/CAD. Analysis and Forecast

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On Friday, the Canadian dollar is gaining against the US dollar, with the USD/CAD pair halting its two-day advance and paring earlier intraday losses, despite a stronger US dollar and weaker retail sales data in Canada. At the time of writing, the pair is trading at 1.3772, pulling back from the day's high of 1.3825, as buyers failed to hold above the psychological 1.3800 level.

The US Dollar Index, which measures the dollar against a basket of six major currencies, continues to rebound after the Fed's decision, trying to stay near its daily high, last seen six days ago. According to Statistics Canada, retail sales fell by 0.8% in July compared with the previous month, in line with forecasts. Meanwhile, the June figure was revised upward from 1.5% to 1.6%. Sales excluding autos dropped by 1.2%, exceeding the expected decline of 0.7%, although June was revised from 1.9% to 2.2%. These figures point to weakening domestic demand and raise concerns about consumer spending following strong growth in the second quarter.The release of economic data followed an important central bank decision earlier in the week. The Bank of Canada cut its key rate by 25 basis points to 2.50%. The regulator justified the monetary easing by citing slower economic growth, declining exports, and labor market issues. Bank of Canada Governor Tiff Macklem signaled readiness for further cuts if risks intensify. Markets now price in about a 40% chance of a cut at the October 29 meeting and nearly 75% by December.

The Federal Reserve also cut its rate by 25 basis points to the 4.00–4.25% range, citing growing concerns over the labor market while maintaining a cautious stance on inflation. According to CME FedWatch, the probability of a cut in October is estimated at 91%, and of another cut in December at nearly 80%. This aligns with the Fed's updated dot plot, which indicates an additional 50 basis points of easing by year-end. However, Chair Jerome Powell emphasized that further action will depend on economic data.

As a result, both central banks are moving toward easing policy, but the Fed is acting more cautiously, while the Bank of Canada is taking a more flexible "dovish" stance, given that Canadian inflation is closer to its target level than in the US.

From a technical perspective, the Relative Strength Index has moved into negative territory. However, the pair found strong support at the 100-day SMA at 1.3758. Failure to hold this level would push prices toward the monthly low and the round level of 1.3700. On the other hand, if prices manage to return above the psychological 1.3800 level and consolidate there, bulls will aim for the monthly high, facing some resistance along the way.

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