The USD/CAD pair extended its gains during Wednesday's Asian trading session, continuing to trade within its recent high range. Despite some technical pullbacks, the US dollar's overall advantage remains pronounced, supported by heightened expectations for Federal Reserve interest rate hikes and mounting growth pressures on the Canadian economy.
Market attention remains centered on the outlook for US monetary policy. The recent Federal Open Market Committee meeting, presided over by Chairman Kevin Warsh, delivered a notably hawkish signal, prompting markets to reassess the future path of interest rates. Several officials emphasized that inflation risks stemming from rising energy prices have not fully subsided, and future policy flexibility is still required to ensure inflation returns to target levels.
Consequently, market expectations for further Fed policy tightening this year have rapidly intensified. According to data from the CME FedWatch Tool, traders now assign an 86.1% probability to a Fed rate hike in December, a significant increase from the approximately 61% level seen before the meeting. This rise in rate hike expectations has kept US Treasury yields and the US Dollar Index elevated, providing solid support for USD/CAD.
Meanwhile, investors are awaiting the release of the US Personal Consumption Expenditures (PCE) Price Index data for May on Thursday. As one of the Fed's most closely watched inflation gauges, the PCE data will directly influence market judgments on future policy direction. Should the data indicate persistent inflationary pressures, it could further strengthen rate hike expectations and continue to bolster the US dollar.
Geopolitical factors are also drawing market focus. Iranian President Pezeshkian stated that Iran's ballistic missile program would not be included in negotiations with the United States, while US President Trump maintains that Iran has agreed to International Atomic Energy Agency inspection arrangements. The differing stances from both sides on key issues highlight the ongoing uncertainty surrounding a potential US-Iran peace agreement.
Furthermore, markets are monitoring developments in the Middle East situation. Should related negotiations face setbacks, safe-haven demand could be reignited, potentially driving capital flows toward assets like the US dollar. Although risk sentiment has improved recently compared to earlier, investor concerns about potential setbacks have not completely dissipated.
In contrast to the US dollar's multi-faceted support, the Canadian dollar has shown relative weakness lately. Bank of Canada Governor Tiff Macklem recently noted that global capital flow imbalances are exacerbating financial stability risks. Specifically, the expanding trade surplus of a major Asian economy and the US's continued reliance on foreign capital could heighten volatility risks for the global financial system in the future.
Market analysts point out that the recent sustained pressure on the Canadian dollar stems from several factors, including the widening interest rate differential between the US and Canada, a slowdown in Canada's economic growth momentum, and trade-related concerns impacting business investment and export prospects. Additionally, the Canadian dollar has not fully benefited from rising oil prices during the Iran conflict as it has historically, further undermining market confidence.
From a daily chart perspective, USD/CAD has maintained an uptrend since initiating a rally from the 1.3600 area and remains within its primary ascending channel. The moving average system continues to show a bullish alignment, indicating the medium-to-long-term trend remains strong. The current exchange rate is holding firmly above the key 1.4200 level, suggesting buying interest still dominates the market. Key resistance levels to watch above are the 1.4250, 1.4300, and 1.4380 areas. A break above the previous high zone could open the door for further gains. Support below is seen at the 1.4150 and 1.4100 areas; a breach of these levels could trigger a corrective phase.
Observing the 4-hour chart, the pair has recently formed a consolidation pattern at elevated levels, with the short-term upward momentum slowing but pullbacks remaining relatively limited. The price continues to trade above the short-term moving averages, reflecting an overall optimistic market sentiment. If the pair can reclaim and hold above 1.4250 subsequently, it could test 1.4300 or higher targets. A drop below the 1.4150 support could lead to a technical adjustment toward the 1.4100 area. However, against the backdrop of persistent Fed rate hike expectations and overall US dollar strength, the room for short-term downside appears limited, and the medium-term trend bias remains bullish.
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