Fed’s Powell opens door to potential rate cuts at Jackson Hole
Trump’s tariff hike on Canada grabbed headlines, but it’s Fed repricing and Powell’s hawkish tone that have kept USD/CAD pushing higher ahead of payrolls.
- Trump lifts Canadian tariffs to 35%
- Fed cut bets pared as Powell stays hawkish
- Strong U.S. data supports US dollar strength
- USD/CAD bullish momentum targets 1.3900
USD/CAD Forecast Summary
Trump’s surprise move to lift Canadian tariffs to 35% grabbed headlines but had little immediate impact on the Loonie, with USD/CAD strength instead driven by a sharp unwind in Fed rate-cut pricing. Jerome Powell’s hawkish tone earlier this week and solid U.S. data have left the US dollar bid, keeping USD/CAD momentum pointed higher ahead of Friday’s payrolls report, which could decide whether the pair tests 1.3900.
Trump Hikes Canadian Tariffs
Donald Trump surprised markets by lifting Canada’s tariff rate from 25% to 35%, with the higher levy set to take effect on August 1. While USMCA-covered goods remain exempt, the White House said products transshipped to evade the duty will instead face a 40% tariff.
The move, taken under emergency powers, was blamed on Canada’s “continued inaction and retaliation” in tackling what the Trump administration described as a worsening fentanyl crisis. The White House pointed to “super labs” in western Canada and record fentanyl seizures at the northern border, arguing that Ottawa has “failed to arrest traffickers, seize illicit drugs, or coordinate with U.S. law enforcement.”
Trump had initially imposed a 25% tariff in February but said further action was “necessary and appropriate” after Canada failed to respond. “Canada has had ample opportunity to act,” the White House said in an official statement, vowing to hold Ottawa accountable while keeping US national security “front and centre.”
Fed Cut Bets Slashed as Strong Data Lifts Dollar
Source: TradingView
Partially reflecting the impact of U.S. import tariffs on the growth and inflation outlook in both the United States and Canada, interest rate differentials have been moving in favour of the U.S. dollar recently, contributing to the rebound in USD/CAD over the past fortnight. That’s shown in the chart above by the correlation coefficient scores with the shape of the 2025 Fed funds futures curve and two-year yield spreads between the U.S. and Canada, sitting at -0.79 and 0.86 respectively.
Source: LSEG
U.S. data has also impressed over the past month, with Citi’s economic surprise index (CESI) rising to the highest level since February. The indicator tracks how data prints relative to expectations, putting increased weight on more recent data to provide insight into near-term trends. At 14.7, the reading indicates more data has been topping forecasts than missing of late, contributing to a sharp unwind in market pricing for Fed rate cuts this year.
Ahead of the July U.S. nonfarm payrolls report on Friday, markets are pricing the least amount of rate cuts from the Fed this year since February at just 29 basis points. While that partially reflects we’re now in August, it also highlights that U.S. economic activity is holding up far better than expected despite tariff uncertainty, seeing the amount of easing priced this year more than halve in July. A full cut is now not priced until December, with a move next month deemed less likely than not—a sharp shift from just days ago.
Source: TradingView
While the move towards no rate cuts from the Fed in 2025 is strengthening, that could change markedly if the payrolls report comes in soft later Friday. The unemployment rate is the key number to watch, as that’s what the Fed cares most about; it’s expected to lift a tenth to 4.2%, giving back half of June’s surprise drop.
Payrolls are forecast to rise by 110,000, down from 147,000 previously. While markets tend to react initially to the payrolls figure, if there’s a divergence relative to the unemployment rate, it’s the latter that may ultimately drive market direction.
USD/CAD: Buying Dips Preferred
Source: TradingView
On the technical front, the morning star pattern completed last Thursday provided an excellent signal on what’s unfolded this week, with USD/CAD surging from below 1.3600 to above 1.3800, clearing horizontal resistance at 1.3650 and 1.3750 along with the 50-day moving average. With RSI (14) pushing higher and MACD crossing above the signal line into positive territory, momentum remains bullish, favouring buying dips and topside breaks.
1.3900 resistance is the first hurdle for bulls to clear, with a break putting 1.4027 and the 200-day moving average on the radar. On the downside, 1.3750 provided both support and resistance earlier this year, making it an important level if profit-taking triggers a pullback ahead of payrolls. Bids may also be lurking beneath 1.3800.