USD/CAD Lingers Below 1.3950: Will Yield Spreads and Oil Prices Dictate Its Next Move?

The USD/CAD pair continues to trade softly, hovering near 1.3930 during early European sessions on Wednesday, May 14, 2025, as market dynamics shift in response to weaker-than-expected US inflation data and ongoing economic concerns in Canada.

April’s US Consumer Price Index (CPI) disappointed, with headline inflation rising 2.3% year-over-year, down from 2.4% in March and missing market forecasts.

Core CPI, excluding volatile food and energy prices, held steady at 2.8% annually, aligning with expectations but offering little relief to a US dollar (USD) under pressure.

This softer inflation reading has tempered expectations for aggressive US Federal Reserve rate hikes, contributing to a widening yield spread between US and Canadian bonds, which exerts downward pressure on the USD/CAD pair.

ALSO READ | USD/CAD Forecast: Hovering Below 1.4000 as US PPI and Powell’s Speech Loom.

Canadian Economic Woes Weigh on the Loonie

In Canada, economic sentiment remains fragile. The IPSOS Consumer Confidence Index plummeted to 47.70 in April, down from 48.20 in March, marking its lowest level since July 2024.

This decline reflects mounting anxieties over inflation, job security, and an escalating trade dispute with the United States, Canada’s largest trading partner.

Compounding these concerns, Canada’s recent employment report revealed lackluster job growth and a rising unemployment rate, dampening hopes for further rate hikes by the Bank of Canada (BoC).

Real-time data indicates Canada’s unemployment rate ticked up to 6.7% in April 2025, compared to 6.5% in March, signaling ongoing labor market challenges. These factors continue to undermine the Canadian dollar (CAD), keeping USD/CAD subdued.

Did You Know?
Canada is the world’s fourth-largest oil exporter, and fluctuations in global oil prices can significantly impact the CAD’s value against major currencies like the USD.

Oil Prices and Inventories Add Pressure

The commodity-linked CAD faces additional headwinds from volatile crude oil markets. West Texas Intermediate (WTI) oil prices, a key driver of CAD strength, retreated to around $63.00 per barrel after a four-day rally.

The American Petroleum Institute (API) reported an unexpected 4.29 million-barrel build in US crude inventories, the largest in six weeks, defying expectations of a 2.4 million-barrel drawdown.

Real-time market updates show WTI trading at $62.85 per barrel as of May 14, 2025, reflecting persistent oversupply concerns. Given Canada’s reliance on oil exports, this price dip further weakens the CAD, supporting the USD/CAD pair’s current range-bound behavior.

What’s Next for USD/CAD?

Traders are now eyeing critical US economic releases, including the Producer Price Index (PPI) and the University of Michigan’s Consumer Sentiment Survey, due later this week.

These reports could provide fresh cues on US inflation trends and consumer outlooks, potentially influencing Federal Reserve policy expectations. Meanwhile, the BoC’s cautious stance, coupled with Canada’s economic challenges, suggests limited upside for the CAD in the near term.

Real-time analysis indicates market participants are pricing in a 60% probability of a 25-basis-point Fed rate hike by July 2025, while BoC rate hike bets remain muted. The interplay of yield spreads, oil prices, and economic data will likely dictate USD/CAD’s next move.