USD/CAD Market Update

USD/CAD Softens to 1.3676 – Friday, February 20, 2026

Current Level: Low-1.37s (24hr range 1.3670–1.3711)

USD/CAD is trading near 1.3676 on Friday morning, edging lower from the previous session as markets digest a mixed batch of U.S. economic data. The pair remains in the low-1.37s range following the release of Q4 GDP figures that showed growth at 1.4%, well below the 2.8% consensus, though CIBC economists caution against focusing too much on the headline slowdown. Core PCE inflation printed at 3.0%, slightly above the 2.9% forecast, reinforcing the Federal Reserve's patient approach to monetary policy.

Market Overview:

Risk appetite is mostly positive this morning, with equity markets reversing pre-market losses despite the soft GDP print and sticky inflation data. The U.S. dollar is slightly higher versus the entire G10 basket, though foreign exchange moves remain limited. Global bond yields are mixed as traders digest the data that included a tepid Canadian retail sales number of -0.4% versus -0.5% consensus. Precious metals are supported with gold and silver rising at the end of the week. The combination of weaker growth and persistent inflation creates a complex backdrop for monetary policy expectations.

U.S. GDP Slows Sharply on Government Shutdown Impact:

U.S. Q4 GDP grew at an annualized pace of 1.4%, softer than the 2.8% consensus forecast. The weakness was largely due to the prolonged government shutdown, which reduced GDP by approximately 1%. CIBC economists warn against focusing too much on the headlines about a sharp slowdown, instead pointing to private domestic demand, which shows how the economy is really doing by removing the noisy factors. Private domestic demand printed at a still healthy rate of 2.4%, suggesting the underlying economy remains resilient despite the headline weakness.

The Federal Reserve's preferred measure of inflation, Core PCE, came in a touch hotter than expectations at 3.0% versus 2.9% consensus. Core inflation remains a full percentage point above the Fed's target, justifying a patient stance from the FOMC. Overall, while the data is messy, it shows softer economic growth combined with stickier inflation. This supports the CIBC house view that the Fed will only cut interest rates twice this year, with the first cut starting in the second half of 2026.

Dollar Faces Headwinds Despite Hawkish Fed Path:

The U.S. dollar index extended its rebound from the January low of 95.551, closing 0.2% higher yesterday. The index has risen every day this week and is now flirting with the 50-day moving average, roughly aligned with the 98 level. This week's steady grind higher reflects a revitalized Fed hawkishness following the January minutes, as well as heightened geopolitical tensions as the U.S. military stations a large array of forces in the Middle East to pressure Iran over its nuclear program. Oil benchmarks have climbed this week to the highest levels since the June 2025 Iran-U.S. geopolitical flareup, adding support for the greenback.

Overall, these factors have helped suppress what remains a soft underlying sentiment toward the dollar. Investors are still disillusioned with the buck, with the debasement trade very much alive. The next key risk to watch is how the Warsh Fed chairmanship interacts with President Trump's preference for lower rates. But with the pick now known and not as dovish as some alternatives, markets appear to be taking a breather from this risk, allowing the dollar to re-engage with its still hawkish-leaning rates-implied path.

Market Reaction Function Shifts to Inflation Focus:

Even with a resilient U.S. macro story for 2026 and its expected bullish effect on the dollar, investors may be reading the data differently than in 2025. Back then, the dominant question was whether tariffs were dampening growth. Positive surprises triggered more vigorous dollar rallies, helped by sentiment gains as evidence mounted that the U.S. economy was weathering tariff impacts far better than feared. Today, with trade uncertainty largely diffused and resilience somewhat priced in, attention has shifted to more traditional questions, most importantly whether inflation is falling enough to justify further cuts this year.

In the months ahead, the dollar's reaction function is expected to be more grounded, with positive surprises offering support but capping more meaningful bullish bursts. For now, the dollar is edging back above the 98 mark, and that may well be the case today as the Personal Consumption Expenditure deflator moved higher. While largely priced in, the Fed's expected disinflation path still implies inflation remaining above target this year, which is why even an on-target print showing a hint of upside risk would keep the hawks on alert and have a more pronounced bullish impact on the dollar.

Canadian Data/Outlook:

Canadian retail sales for December came in at -0.4% versus -0.5% consensus, a modest beat that had limited impact on the Canadian dollar. Canada has no other major economic data releases today, with the focus remaining on broader market developments and U.S. data. The Bank of Canada is expected to remain on hold at 2.25% through the remainder of 2026, with the central bank comfortable at the bottom of the neutral range for the foreseeable future. The Canadian dollar faces headwinds from trade policy uncertainty and the potential for CUSMA renegotiation, though the light Canadian economic calendar leaves the pair vulnerable to U.S. data releases and global risk sentiment shifts.

Fed Watch:

The Federal Reserve is expected to remain on hold at its next policy meeting on March 18, with current market pricing pointing to unchanged policy through the near term. The Fed's expected disinflation path still implies inflation remaining above target this year. CIBC economists maintain their house view that the Fed will only cut interest rates twice this year, with the first cut starting in the second half of 2026. Core inflation remains a full percentage point above the Fed's target, justifying a patient stance from the FOMC. The divergence between GDP and the job market over the last several years has made activity data less important to the Fed, keeping the focus on jobs and inflation data.

Technical Picture:

Resistance: 1.3725 (CIBC near-term target), 1.3900 (CIBC range top and selling level)
Support: 1.3670 (24hr low), 1.3600 (CIBC buying level and key support)
Outlook: USD/CAD is trading in the low-1.37s, remaining near multi-week highs following the data dump. In the near-term, CIBC strategists are targeting a move to 1.3725. In the bigger picture, the CIBC team continues to favor the 1.36 to 1.39 range. The pair has closed above the 200-week moving average, which is good news for bulls. Current levels favor USD buyers, with CIBC targeting a 1.3600 to 1.3900 range in the near term.

Week Ahead:

The week ahead features Australian inflation data on Tuesday, which will provide insight into the Reserve Bank of Australia's policy path. Canadian GDP data is due Friday, offering a timely read on the strength of the domestic economy. U.S. data includes weekly unemployment claims on Thursday and producer price index figures on Friday. The following week brings key U.S. labor market data, including the ISM Manufacturing PMI on Monday, ADP employment change on Wednesday, and the full employment report on Friday. For USD/CAD, the immediate question is whether the pair can break above resistance at 1.3725 or if renewed selling pressure will push the pair back toward support at 1.3600.

Other Notes:

• EUR/USD Drifts Lower on Rate Differentials: EUR/USD traded lower throughout the week and is now hovering below the 1.18 mark. A technical clean-out after the ferocious rally that pushed the pair to highs last seen in 2021 partly explains the move lower. But widening rate differentials, along with heightened geopolitical tensions, really forced the issue this week, attempting to overshadow the still-soft sentiment around the dollar. On the U.S. side, strong ADP weekly change and firm industrial production data reinforced the narrative of a more stable labor market and resilient economic activity. On the euro side, the headline was Lagarde stepping down earlier than expected. The move appears strategically political, intended to let leaders Merz and Macron have a say in the next ECB president before France's 2027 general elections. Meanwhile, there were hints of dovishness tied to inflation undershooting, with ECB officials becoming more vocal about it and the rates market beginning to pay closer attention. Overnight Index Swaps now price roughly a 30% chance of a cut by November.
• GBP Faces Biggest Weekly Decline in Over a Year: Sterling is on track for its biggest weekly decline against the dollar in more than a year, down 1.4% as GBP/USD breaks through key support and flirts with its 200-day moving average near $1.3445. The slide reflects a decisive dovish turn in UK data. Unemployment has risen, wage growth has cooled, and headline inflation dropped sharply, prompting markets to price an 80% chance of a March BoE cut. Catherine Mann's warning about labor market risks only reinforced that shift. This morning's releases offered a rare counterweight. Retail sales surged 1.8% in January, the strongest monthly rise since May 2024, while public finances posted a record £30.4bn January surplus. Even with today's upside surprises, the pound remains hostage to a labor market losing momentum and inflation falling faster than expected.
• UK PMI Data Shows Mixed Picture: UK Flash Manufacturing PMI came in at 51.5 versus 51.8 previous, while Flash Services PMI printed at 53.5 versus 54.0 previous. The data shows a slight cooling in activity but remains in expansion territory. German Flash Manufacturing PMI came in at 49.6 versus 49.1 previous, while German Flash Services PMI held steady at 52.4. U.S. Flash Services PMI is forecast at 53.0 versus 52.7 previous, while Flash Manufacturing PMI is expected to hold at 52.4.
• Geopolitical Tensions Support Oil Prices: Oil benchmarks have climbed this week to the highest levels since the June 2025 Iran-U.S. geopolitical flareup. The U.S. military has stationed a large array of forces in the Middle East to pressure Iran over its nuclear program. This has added support for the greenback and provided some support to the Canadian dollar through higher oil prices, though this is more than offset by the broader risk-off tone favoring the U.S. dollar.

Market Mood:

RSI Scale: <30 Oversold | 30-40 Risk-Off | 40-60 Neutral | 60-70 Risk-On | >70 Overbought

This commentary is provided for informational purposes only and should not be construed as investment, legal, or tax advice. Past performance is not indicative of future results. Please consult with qualified professionals before making any financial decisions. Vantry Capital Inc.