**US Dollar Forecast: USD/CAD Extends Winning Streak as Market Eyes Fed Policy and Oil Prices**
*Original article by Diego Colman, Forex.com. Supplemented with additional analysis and market data.*
The US dollar has pushed higher against the Canadian dollar, marking a three-day rally for the USD/CAD currency pair. This upward momentum comes amid shifting expectations surrounding US interest rate policy, fluctuating oil prices, and ongoing economic signals from both the United States and Canada.
This analysis explores the factors supporting the USD/CAD rally, with insight into future policy actions from the Federal Reserve and the Bank of Canada, macroeconomic indicators, and commodities market dynamics. The broader context of global economic uncertainty is also considered, highlighting what traders should watch going forward.
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### USD/CAD Rebounds: Key Drivers Behind the Rally
On September 1, 2025, the USD/CAD currency pair extended its rebound to a third straight session, climbing above the 1.3550 level. Several key catalysts have contributed to this move:
1. **Weak Canadian GDP Data**
– Canada’s economy unexpectedly contracted in Q2 2025, with real GDP shrinking by 0.2% on an annualized basis.
– The consensus among economists had been for slight growth, so the negative print raised concerns about Canada’s economic momentum.
– Monthly data for June 2025 also revealed no economic growth, further suggesting stagnation.
– These figures prompted market expectations that the Bank of Canada (BoC) will maintain a dovish monetary stance through the end of the year, or potentially even cut rates if economic weakness deepens.
2. **Renewed Strength in the US Dollar**
– The US dollar has risen broadly across the major currencies, supported by rising US Treasury yields and resilient US economic data.
– The Federal Reserve’s commitment to keeping interest rates higher for longer continues to offer the greenback a yield advantage.
– Recent comments from Fed officials indicate a reluctance to cut rates prematurely, particularly with inflation still above the 2% target.
3. **Declining Crude Oil Prices**
– As crude oil is Canada’s key export, its price fluctuations significantly influence the value of the Canadian dollar.
– WTI crude slipped below $85 per barrel amid renewed concerns about China’s economic outlook and rising global inventories.
– Lower oil prices have weighed heavily on the loonie, reinforcing USD/CAD’s upward pressure.
4. **Technical Momentum for USD/CAD**
– The currency pair has broken through key resistance levels, encouraging further buying interest.
– Traders responded to the clean break above the 1.3500 psychological handle, targeting higher levels near 1.3600.
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### Federal Reserve Outlook: Higher for Longer?
Recent economic strength in the US has complicated expectations around the Federal Reserve’s direction for monetary policy. Fed Chair Jerome Powell has reiterated the importance of ensuring inflation returns sustainably to 2%, even if that means maintaining restrictive policy settings longer than markets previously anticipated.
Key data points supporting the Fed’s hawkish stance include:
– **Resilient Labor Market**
– Unemployment in the US remains near multi-decade lows.
– Wage growth continues to exceed expectations, which supports consumer spending.
– **Sticky Inflation**
– Both the Consumer Price Index (CPI) and the core Personal Consumption Expenditures (PCE) index remain above 3%, making a premature pivot to rate cuts unlikely.
– **Robust GDP Growth**
– Preliminary estimates for Q2 GDP showed annualized expansion above 2%, underscoring the economy’s continued momentum.
As a result, markets now widely expect the Fed to hold rates steady through Q4 2025, with a potential rate cut not fully priced in until well into 2026.
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### Bank of Canada’s Policy Dilemma
In stark contrast to the US, Canada’s economic outlook has become more uncertain:
– **Cooling Labor Market
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