**USD/CAD Forecast: Loonie’s Slide Intensifies Amid Widening Divergence**
Authored by Kenny Fisher, originally published on Forex Crunch, July 31, 2025
The Canadian dollar (CAD) has entered a deepening slump against the U.S. dollar (USD), with the USD/CAD pair marking significant gains as of late July 2025. Current price action shows no sign of a reversal, as diverging economic trajectories in the U.S. and Canada, coupled with contrasting monetary policy outlooks, continue to exert pressure on the loonie.
At the time of writing, USD/CAD is trading at 1.4085, having risen by 0.72 percent on the day. This marks the highest level since March 2020, when pandemic-related market volatility shook global currency markets.
This article delves into the fundamental and technical factors driving USD/CAD higher, while also considering how upcoming data releases might influence the currency pair going forward.
Key Takeaways:
– USD/CAD reaches 1.4085, its highest level in over five years
– Canadian economic indicators weaken; US economy stays resilient
– Central bank outlooks diverge: Fed holds firm while BoC keeps dovish tone
– Market pricing shows possible further downside for CAD
## Canadian Economic Weakness Amplifies Pressure on the Loonie
The Canadian dollar has lagged behind its major peers in recent weeks, underpinned by disappointing macroeconomic data and soft inflation numbers. On July 30, Statistics Canada reported that the country’s economy unexpectedly contracted in May, shrinking by 0.2 percent on a monthly basis. Recent growth forecasts for Q2 2025 have also been downgraded, with several economists now expecting annualized GDP under 0.5 percent for the quarter.
Canada’s monthly GDP highlights:
– May GDP: -0.2% (expected: 0.1% growth)
– April GDP (revised): 0.1%
– Services sector: flat
– Goods-producing industries: -0.5% contraction
– Key drags: manufacturing, construction
This backdrop of economic stagnation complicates the outlook for the Bank of Canada (BoC), which left its policy interest rate unchanged at 4.25 percent during its July meeting. While the benchmark rate remains relatively high, BoC policymakers struck a noticeably dovish tone, emphasizing downside risks to growth and signaling openness to rate cuts in the coming months.
In contrast, inflation progress has not met expectations. The latest CPI report shows annual inflation at 2.4 percent, moving closer to the BoC’s 2 percent target. Though this could theoretically give the central bank room to ease monetary policy, markets worry that easing into economic weakness could further weaken the loonie.
## U.S. Outpaces Canada in Growth and Policy
On the flip side, the U.S. economy has shown impressive resilience, with robust employment gains, stable consumer spending, and inflation that remains above the Federal Reserve’s 2 percent target. Last week, U.S. Q2 GDP posted annualized growth of 2.2 percent, beating market forecasts of 1.8 percent. Unemployment remains below 4 percent, suggesting tight labor market conditions continue to support aggregate demand.
The Fed, led by Chair Jerome Powell, has so far refrained from committing to rate cuts in 2025. The Federal Open Market Committee (FOMC) held the target rate steady at 5.25 to 5.50 percent at its July meeting, reiterating the need to see sustained disinflation before loosening monetary conditions.
Fed Chair Powell’s comments:
– “Inflation has come down but remains elevated”
– “We are not yet confident that inflation is sustainably moving toward our 2% target”
– “Further policy tightening is not off the table, though not presently necessary”
The result of this divergence in interest rate outlooks between the
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