USD/CAD extends gains on trade optimism, policy divergence, and upcoming US data

• USD/CAD trades near 1.3945, extending Friday's rally and marking its fourth consecutive session of gains.
• US-China trade truce lifts global risk sentiment, supporting the Greenback.
• Markets await Tuesday's US CPI data, Fed comments, and broader macro updates.

The US Dollar (USD) is trading higher against the Canadian Dollar (CAD) at the start of the week, supported by renewed risk appetite following a US-China trade agreement, diverging interest rate expectations, and anticipation of major US economic data. 

At the time of writing, USD/CAD is trading around 1.3945, sustaining bullish momentum from Friday.

US-China tariff pause lifts sentiment and supports the US Dollar

Risk sentiment improved after US and Chinese officials agreed to a 90-day pause on new tariffs, easing pressure on global supply chains and tempering fears of a near-term economic slowdown. 

While Canada is not directly involved in the agreement, the development has reinforced global demand expectations and strengthened the US Dollar by boosting market confidence.

The trade truce has also bolstered expectations that the Federal Reserve (Fed) will maintain its restrictive policy stance for longer, particularly as inflation remains above target and labor market resilience persists.

Key US data and Fed speakers to guide USD/CAD direction

This week presents a dense macroeconomic calendar that could shape USD/CAD direction. On Tuesday, all eyes will be on the April US Consumer Price Index (CPI) report. 

Markets expect a 0.3% MoM increase in both the headline and core CPI, with YoY figures projected to remain steady at 2.4% and 2.8%, respectively.

While CPI is a critical input for Fed policy, it is part of a broader narrative. The outlook will also be shaped by comments from several Fed officials, most notably Chair Jerome Powell, who is scheduled to speak on Thursday. His remarks will follow earlier commentary from Governors Waller, Jefferson, and Daly earlier in the week.

Together, these events will help clarify whether the Fed is inclined to maintain its current policy stance or consider cuts later this year. According to CME FedWatch, the first rate cut is now broadly expected in September, though this timeline remains highly sensitive to upcoming data.

Canadian labor market signals underlying weakness

Meanwhile, domestic fundamentals continue to weigh on the Canadian Dollar. Friday's labor market report from Statistics Canada showed a net employment gain of 7,400 jobs in April, above the 2,500 forecast. However, the unemployment rate unexpectedly climbed to 6.9%, the highest level since late 2023 outside of pandemic-related distortions.

The report reveals signs of slack in the labor market, especially in the manufacturing sector, where job losses continue to accelerate. These trends have increased expectations for a potential Bank of Canada rate cut as early as June, further widening the policy divergence with the Fed and undermining support for the Loonie.

USD/CAD near 1.40 as bullish momentum builds

USD/CAD has broken above the 61.8% Fibonacci retracement level of the September 2024 to February 2025 rally, which sits at 1.3944. Price action is now confronting the 200-day moving average (currently at 1.4018), with the next resistance seen at the 50% retracement level at 1.4106.

USD/CAD daily chart

A sustained daily close above the 1.4018 area would reinforce bullish momentum and open the door toward the April high at 1.4415 and possibly the March high at 1.4536. However, short-term consolidation is possible given the strong run from the May low, especially with high-impact data and Fed commentary ahead.

On the downside, support lies at 1.3944 (the broken Fib level), followed by the November 2024 low at 1.3823. The Relative Strength Index (RSI) is trending higher and currently near 55.6, suggesting there is room for further gains before overbought conditions emerge.