USD/CAD Forecast: CAD Weakness & Spread Volatility
USD/CAD faces significant weakness as U.S. inflation data disappoints, fueling expectations of federal Reserve rate cuts, signaling a potential downtrend for the currency pair. This has triggered a breach of crucial support levels. Narrowing yield spreads between U.S. and Canadian bonds are intensifying the pressure, wiht the pair breaking below the 1.3650 support zone and uptrend support from December 2023. The weakening U.S. inflation figures have bolstered the case for the Federal Reserve to resume its easing cycle. Market-based inflation expectations are adjusting, with short-term traders increasingly pricing in the possibility that inflation may not accelerate as previously anticipated. The upcoming FOMC interest rate decision is highly anticipated as a primary influence. News Directory 3 provides insights into these shifts in the currency market. Discover what’s next for the USD/CAD.
USD/CAD Faces Weakness Amid US Inflation Data, Fed Rate Cut Expectations
Updated June 13, 2025
The USD/CAD exchange rate is under pressure as recent U.S. economic data has fallen short of expectations, leading markets to anticipate more aggressive rate cuts from the Federal Reserve. this advancement has considerably impacted the currency pair, causing it to breach long-held support levels.
Weaker U.S. inflation figures have bolstered the argument for the Federal Reserve to resume its easing cycle. This coincides with strong demand for U.S.Treasuries, resulting in a sharp narrowing of yield spreads between the united States and Canada. These factors have combined to drive recent USD/CAD movements, leading to the breakdown of several key technical levels.
U.S. inflation data is currently undershooting expectations at a rate not seen in over a decade. Citi’s U.S. economic surprise index reflects this trend, suggesting limited pass-through of import tariffs and weakening price pressures in services, potentially due to a softer labor market.
Market-based inflation expectations have adjusted to reflect this weaker inflationary pulse. Five and 10-year inflation swaps have fallen significantly from their February highs,indicating a shift in expectations for future annual inflation rates.
Short-term rates traders are increasingly factoring in the possibility that inflation may not accelerate as previously anticipated. Pricing for Federal Reserve rate cuts this year has increased, with markets now anticipating more than two full 25-basis-point cuts.
Strong demand at recent U.S. Treasury auctions has led to significant declines in U.S. bond yields across the curve. This has narrowed yield differentials with other major nations, including Canada, further pressuring the USD/CAD.
The compression of yield spreads between U.S. and Canadian bonds has been a major driver of recent USD/CAD weakness. The correlation between these spreads and USD/CAD movements has strengthened noticeably, especially in recent weeks.
Given the yield compression and its strong relationship with USD movements, the USD/CAD has experienced significant technical damage. The pair broke below the 1.3650 support zone and long-running uptrend support dating back to December 2023.
The bearish move stalled at 1.3600, a level with a history of tests but infrequent breaches. If the downtrend continues, the next downside target is 1.3550, followed by a more considerable test at 1.3420.
While the USD/CAD remains in a downtrend from its may highs, some analysts suggest it may be forming a falling wedge pattern, hinting at a potential countertrend move. The Relative Strength Index (RSI) is currently in oversold territory, indicating a possible squeeze risk. However,the overall momentum remains bearish,favoring selling rallies.
On the upside, the confluence of horizontal support at 1.3650,former uptrend support,and downtrend resistance from the May highs would present a significant challenge for bulls. A break and close above this zone would invalidate the bearish bias and potentially lead to a retest of 1.3750.
What’s next
The upcoming U.S. FOMC interest rate decision will be a key event, given the influence of rate differentials on recent USD/CAD movements. The fed’s updated dot plot will likely drive market direction. U.S. and Canadian inflation figures will also be closely watched.