Title: USD/CAD Outlook: Canadian Dollar Strengthens on Industrial Data as Fed Rate Cut Nears
Author: Adapted from Yohay Elam’s original article on Forex Crunch (September 16, 2025)
The USD/CAD currency pair has come under renewed pressure as the Canadian dollar (CAD), often referred to as the loonie, posted gains following positive domestic data. This momentum is further supported by growing market expectations that the U.S. Federal Reserve could initiate an interest rate cut in the coming months. As the markets digest the latest economic indicators from both countries, the USD/CAD exchange rate continues to reflect a dynamic interplay of macroeconomic factors, central bank policy expectations, and commodity market trends.
This report explores the recent movement in the USD/CAD pair, examining the drivers behind the Canadian dollar’s rise, the implications of potential monetary shifts by the U.S. Federal Reserve, and broader market sentiment affecting the Canadian economy.
Recent Performance of the USD/CAD Pair
The Canadian dollar has shown a modest but notable recovery, with the USD/CAD pair retreating from recent highs. This shift follows the release of key Canadian economic data, along with dovish signals from U.S. policymakers.
– The USD/CAD has dropped back near the 1.3500 handle, falling from levels above 1.3600 earlier in the month.
– Improved Canadian industrial data has supported the loonie’s recent gains.
– Market sentiment suggests a growing likelihood that the Federal Reserve will cut interest rates before the end of the year.
Key Drivers Supporting the Loonie
Several economic indicators and developments are reinforcing bullish pressure on the CAD:
1. Strong Canadian Factory Sales
– Statistics Canada reported a 1.9% increase in manufacturing sales for July, surpassing analyst expectations. The rise was seen across multiple sectors, with notable contributions from:
– Transportation equipment manufacturing
– Refinery sector output
– Food and beverage production
– Robust factory activity signals increased domestic demand and industrial strength, key factors influencing currency appreciation.
2. Commodity Prices and Oil Influence
– As a major crude oil exporter, the Canadian dollar is heavily correlated with the price of oil.
– West Texas Intermediate (WTI) crude prices have hovered near the $90 per barrel level, maintaining strength that benefits the Canadian economy.
– Stable to strong oil prices enhance Canada’s trade balance and support a stronger currency.
3. U.S. Economic Concerns and Fed Policy Expectations
– Several U.S. economic indicators have pointed to a softening in inflationary pressure and slowing consumer demand, prompting speculation that the Federal Reserve may soon pivot to rate cuts.
– Market futures pricing reflects growing odds of a Fed rate reduction by the end of Q4 2025.
– Lower interest rates in the U.S. narrow the yield differential between the two countries, making the CAD more attractive.
Federal Reserve Outlook: Dovish Turn on the Horizon?
The Federal Reserve held steady on interest rates at its last policy meeting, but dovish tones in member speeches and economic data have shifted the narrative. As U.S. inflation moderates and job market signals turn mixed, the Fed may be preparing for a rate-cut roadmap.
– Fed Chair Jerome Powell and other officials have mentioned that policy is “sufficiently restrictive” to tame inflation.
– The latest U.S. CPI (Consumer Price Index) came in slightly lower than forecast at 3.4% year-over-year, suggesting progress toward the central bank’s 2% inflation target.
– Retail sales growth has slowed, and initial unemployment claims have edged higher, pointing to cooling demand.
– The CME FedWatch Tool currently prices nearly a 70% chance of a rate cut by December 2025.
Canadian Economic Outlook: Momentum Gaining Traction
In contrast to the cautious optimism in the U.S., Canada’s economy is showing signs of resilience, bolstering the loonie’s performance.
Read more on USD/CAD trading.