US–China tariff truce boosts sentiment; CPI, Fed outlook in focus

USD/CAD trades near 1.3945, extending Friday’s rally and marking its fourth consecutive session of gains. US–China trade truce lifts global risk sentiment, supporting the Greenback. Markets await Tuesday’s US CPI data, Fed comments, and broader macro updates. The US Dollar (USD) is trading higher against the Canadian Dollar (CAD) at the start of the week, supported by renewed risk appetite following a US–China trade agreement, diverging interest rate expectations, and anticipation of major US economic data. At the time of writing, USD/CAD is trading around 1.3945, sustaining bullish momentum from Friday. US–China tariff pause lifts sentiment and supports the US Dollar Risk sentiment improved after US and Chinese officials agreed to a 90-day pause on new tariffs, easing pressure on global supply chains and tempering fears of a near-term economic slowdown. While Canada is not directly involved in the agreement, the development has reinforced global demand expectations and strengthened the US Dollar by boosting market confidence. The trade truce has also bolstered expectations that the Federal Reserve (Fed) will maintain its restrictive policy stance for longer, particularly as inflation remains above target and labor market resilience persists. Key US data and Fed speakers to guide USD/CAD direction This week presents a dense macroeconomic calendar that could shape USD/CAD direction. On Tuesday, all eyes will be on the April US Consumer Price Index (CPI) report. Markets expect a 0.3% MoM increase in both the headline and core CPI, with YoY figures projected to remain steady at 2.4% and 2.8%, respectively. While CPI is a critical input for Fed policy, it is part of a broader narrative. The outlook will also be shaped by comments from several Fed officials, most notably Chair Jerome Powell, who is scheduled to speak on Thursday. His remarks will follow earlier commentary from Governors Waller, Jefferson, and Daly earlier in the week. Together, these events will help clarify whether the Fed is inclined to maintain its current policy stance or consider cuts later this year. According to CME FedWatch, the first rate cut is now broadly expected in September, though this timeline remains highly sensitive to upcoming data. Canadian labor market signals underlying weakness Meanwhile, domestic fundamentals continue to weigh on the Canadian Dollar. Friday’s labor market report from Statistics Canada showed a net employment gain of 7,400 jobs in April, above the 2,500 forecast. However, the unemployment rate unexpectedly climbed to 6.9%, the highest level since late 2023 outside of pandemic-related distortions. The report reveals signs of slack in the labor market, especially in the manufacturing sector, where job losses continue to accelerate. These trends have increased expectations for a potential Bank of Canada rate cut as early as June, further widening the policy divergence with the Fed and undermining support for the Loonie. USD/CAD near 1.40 as bullish momentum builds USD/CAD has broken above the 61.8% Fibonacci retracement level of the September 2024 to February 2025 rally, which sits at 1.3944. Price action is now confronting the 200-day moving average (currently at 1.4018), with the next resistance seen at the 50% retracement level at 1.4106. USD/CAD daily chart A sustained daily close above the 1.4018 area would reinforce bullish momentum and open the door toward the April high at 1.4415 and possibly the March high at 1.4536. However, short-term consolidation is possible given the strong run from the May low, especially with high-impact data and Fed commentary ahead. On the downside, support lies at 1.3944 (the broken Fib level), followed by the November 2024 low at 1.3823. The Relative Strength Index (RSI) is trending higher and currently near 55.6, suggesting there is room for further gains before overbought conditions emerge. Canadian Dollar FAQs The key factors driving the Canadian Dollar (CAD) are the level of interest rates set by the Bank of Canada (BoC), the price of Oil, Canada’s largest export, the health of its economy, inflation and the Trade Balance, which is the difference between the value of Canada’s exports versus its imports. Other factors include market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – with risk-on being CAD-positive. As its largest trading partner, the health of the US economy is also a key factor influencing the Canadian Dollar. The Bank of Canada (BoC) has a significant influence on the Canadian Dollar by setting the level of interest rates that banks can lend to one another. This influences the level of interest rates for everyone. The main goal of the BoC is to maintain inflation at 1-3% by adjusting interest rates up or down. Relatively higher interest rates tend to be positive for the CAD. The Bank of Canada can also use quantitative easing and tightening to influence credit conditions, with the former CAD-negative and the latter CAD-positive. The price of Oil is a key factor impacting the value of the Canadian Dollar. Petroleum is Canada’s biggest export, so Oil price tends to have an immediate impact on the CAD value. Generally, if Oil price rises CAD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Oil falls. Higher Oil prices also tend to result in a greater likelihood of a positive Trade Balance, which is also supportive of the CAD. While inflation had always traditionally been thought of as a negative factor for a currency since it lowers the value of money, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Higher inflation tends to lead central banks to put up interest rates which attracts more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in Canada’s case is the Canadian Dollar. Macroeconomic data releases gauge the health of the economy and can have an impact on the Canadian Dollar. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the CAD. A strong economy is good for the Canadian Dollar. Not only does it attract more foreign investment but it may encourage the Bank of Canada to put up interest rates, leading to a stronger currency. If economic data is weak, however, the CAD is likely to fall. Source: https://www.fxstreet.com/news/usd-cad-extends-gains-on-trade-optimism-policy-divergence-and-upcoming-us-data-202505121807