- The US dollar has been on the upside against the Canadian dollar since the beginning of May, as oil price volatility spiked on Iran war ceasefire talks
- FOMC meeting at the end of April retained interest rates at3.50-3.75% range, making the US dollar more attractive, with the Bank of Canada seemingly reluctant to raise rates
- Federal Reserve announcements, US economic data and oil prices will likely define the USD/CAD pair's performance in the coming weeks
The USD/CAD forex pair has quietly put together one of its more interesting runs of 2026, climbing more than 1% since the start of May and holding its ground against a backdrop of competing forces. That might not sound dramatic, but in the relatively tight-range environment this pair has operated in this year, it is a meaningful shift.
To understand why the Canadian dollar is losing ground to its southern neighbor, we have to look closely at shifting central bank expectations and an unusual disconnect in the energy markets.
What is Fueling the US Dollar’s Engine?
The greenback’s recent strength largely comes from a significant shift in how the market views Federal Reserve monetary policy. Early this year, most anticipated steady rate cuts. But economic realities have altered that outlook. Stubborn inflation and a robust job market have nudged the Fed toward a more hawkish stance.
Throughout May, the US dollar has maintained a firm, though range-bound, position, bolstered by elevated interest rates and strong US economic indicators. The Federal Reserve held its benchmark rate at 3.50-3.75% during its April 28-29 FOMC meeting. New data still points to a resilient labor market and inflation, so there’s little immediate pressure for the Fed to make a major policy change.
Meanwhile, the Bank of Canada, having cut rates faster than most expected over the past year, finds itself with considerably less room to manoeuvre.
The Oil Disconnect And Why CAD Lost Its Shield
Historically, the Canadian dollar has often functioned as a commodity currency, closely influenced by crude oil prices, given that oil is a major Canadian export. However, May has revealed an interesting weakening in this customary correlation. Speculation regarding a potential diplomatic resolution between the US and Iran has contributed to downward pressure on crude prices.
In recent weeks, oil prices have shown volatility but have not provided consistent support to the loonie sufficient to counteract dollar gains. While periods of elevated crude prices have offered temporary CAD support, their influence has been limited amid broader US economic outperformance. The correlation remains relevant yet is often moderated by interest rate differentials and other macroeconomic variables.
Outlook for the Coming Weeks
The pair’s direction in the weeks ahead will probably depend on US data, Federal Reserve announcements, and what happens in the oil market. Many forecasts anticipate continued range-bound trading with a mild upside bias for USD/CAD in the near term, potentially testing levels toward 1.39 if dollar momentum persists.
Nevertheless, potential risks exist in both directions. Should Canada report stronger-than-anticipated economic data or a sustained rise in oil prices, the Canadian dollar could see significant support. Technical levels around 1.37-1.39 will be closely watched for breakout signals.
A resilient US economy, elevated Fed rates, early-month oil softness from Iran deal expectations, and a widening US–Canada rate differential all pushed the dollar higher.
The Bank of Canada faces a cooling economy and a dovish path, while the Federal Reserve maintains a strict, higher-for-longer interest rate advantage.
A prolonged rally in oil prices, a narrowing of interest rate differentials if the Federal Reserve starts implementing rate cuts, or an overall improvement in global risk sentiment could each support the Canadian dollar.
