USD/CAD Tumbles as U.S. Inflation Craters—Is the Loonie’s Rally Just Starting?

U.S. inflation is missing forecasts at a pace not seen in over a decade, with May’s CPI and PPI data underperforming, as reported on June 13, 2025. Citi’s U.S. economic surprise index has plummeted, signaling limited tariff passthrough and easing service-sector price pressures.

Markets now expect over two 25-basis-point Federal Reserve rate cuts this year, weakening the U.S. dollar and propelling USD/CAD below 1.3600, a level rarely crossed recently.

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Canadian Dollar Seizes the Spotlight

The loonie is thriving as U.S. dollar weakness accelerates. USD/CAD breached critical support at 1.3650 on Thursday, snapping a 17-month uptrend from December 2023. The Bank of Canada’s steady 2.75% policy rate contrasts with the Fed’s 4.25-4.5% range, narrowing yield spreads and boosting CAD.

Strong demand for U.S. Treasuries has further compressed U.S.-Canada bond yields, with 10-year spreads nearly vanishing, a trend driving USD/CAD’s near-perfect correlation with yields this week.

Technicals Scream Bearish Momentum

The chart of USD/CAD presents a favorable environment for bears. A falling wedge formed after the break below 1.3650 suggests a potential short-term bounce, but an oversold RSI (14) indicates caution. The next downside target is 1.3550, a September 2024 support, with 1.3420 as a deeper test.

Bulls need to close above 1.3650 to reverse the tide, potentially eyeing 1.3750. With momentum favoring sellers, traders are bracing for volatility ahead of key data releases.

Did you know?
In 1986, the Canadian dollar plunged to 0.691 USD during a global oil slump, only to rebound 40% in a decade.

FOMC and Retail Sales Hold the Keys

Wednesday’s FOMC decision is critical, with markets anticipating a dovish dot plot shift from the Fed’s prior two-cut forecast. Jerome Powell’s press conference could amplify or reduce expectations for rate cuts. U.S. and Canadian retail sales data, due next week, will also shape sentiment.

Canada’s resilient economy, despite WTI crude at $69.36 per barrel, gives the loonie an edge, but oversold conditions could spark a snapback if U.S. data surprises. The Canadian dollar is strengthening its position as U.S. inflation declines and Fed cuts are imminent. Will USD/CAD’s plunge continue, or is a bullish reversal lurking?