Canadian Dollar Pressured by Trade Risks and Policy Expectations

Canadian Dollar sentiment remains fragile at the start of the week as investors balance renewed trade tensions with anticipation around key central bank decisions. Fresh US tariff rhetoric linked to Canada’s trade relationship with China has reintroduced political risk into FX markets, keeping the Loonie vulnerable to shifting headlines. While Canadian officials have downplayed the likelihood of immediate trade escalation, uncertainty alone has been enough to dampen confidence.

Markets appear cautious rather than panicked, suggesting that aggressive trade actions may not materialize in the near term. Still, the Canadian Dollar continues to react to broader risk sentiment as investors remain wary of how geopolitical developments could affect growth and trade flows.

Monetary policy in focus for USD/CAD

Monetary policy expectations are another major driver for the Canadian Dollar this week. The Bank of Canada (BoC) is widely expected to leave interest rates unchanged, but its accompanying statement and updated forecasts will be closely scrutinized. Investors are keen to assess how policymakers balance external trade risks against domestic inflation and economic resilience.

Across the border, a packed US economic calendar is also influencing the USD/CAD outlook. Key releases covering growth, inflation, and labor market conditions could reshape expectations around the Federal Reserve’s policy path. The Fed is expected to hold rates steady, but any change in tone could have a direct impact on the Canadian Dollar via movements in the US Dollar.

Market drivers keep pressure on the Canadian Dollar

Ongoing trade uncertainty continues to weigh on the Canadian Dollar, even as Canada has reiterated that a free trade agreement with China is not on the table. This clarification helped ease some tariff-related fears, but volatility remains elevated as markets await further clarity.

At the same time, risk-off flows have limited upside momentum for the Loonie, particularly ahead of a policy-heavy week that includes decisions from both the BoC and the Fed.

USD/CAD outlook and technical levels

The Canadian Dollar has recently lost momentum after a five-day winning streak against the weakening US Dollar. USD/CAD briefly fell to a one-month low before stabilizing near the 1.3700 level, where short-term support has emerged.

Continued softness in the US Dollar Index has provided some underlying support for the Canadian Dollar, though the 1.3600 area remains a significant longer-term barrier. Technical indicators suggest overextended conditions, leaving room for a potential corrective move toward the 1.4000 region in the months ahead.

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