USD/CAD Market Update

USD/CAD Tumbles to 1.3642 – Friday, February 27, 2026

Current Level: Mid-1.36s (24hr range 1.3648–1.3685)

USD/CAD is trading near 1.3642 on Friday morning, declining 68 pips from the previous session as the pair retreats from recent highs. The U.S. dollar is weaker across the G10 basket following a stubbornly hot inflation print that slammed risk sentiment. Markets are reassessing the Federal Reserve's ability to tame inflation as producer prices surged well beyond expectations, while Canadian GDP data showed a technical contraction driven primarily by inventory adjustments rather than economic weakness.

Market Overview:

Risk appetite is negative this morning, with equity markets opening lower as hot inflation data weighs on sentiment. The U.S. dollar is weaker versus the G10 basket, as traders doubt the Fed's ability to tame hot inflation. Global bond yields are marginally lower, with Canadian government bonds down a couple of basis points following the Q4 GDP contraction. Energy prices are supported, as elevated inflation and geopolitical tensions push crude oil to its highest level since June 2025. The combination of inflation concerns and mixed growth data creates a complex backdrop for currency markets.

U.S. Producer Prices Surge Beyond Expectations:

U.S. producer prices for January increased by 0.5% versus 0.3% consensus, significantly hotter than estimates. The core reading excluding food and energy increased by 0.8% versus 0.3% consensus, the hottest monthly print since last July, pushing the annualized pace to 3.6% versus 3.0% consensus. These are bad numbers that bring up real concerns about inflation and potentially stagflation. The Fed has more reasons to remain patient. Risk assets have reacted accordingly.

The silver lining is that the market typically discounts PPI and focuses more on CPI and PCE. This means that investors will place extra weight on the next several CPI and PCE readings to see if they confirm the strength seen in today's PPI. However, the hotter-than-expected pipeline pressure indicates that the disinflationary trend seen in late 2025 may have hit a significant speed bump, as rising input costs for producers threaten to spill over into consumer prices in the coming months.

U.S. Labor Market Shows Continued Resilience:

Initial jobless claims for the week ending February 21 came in at 212,000, outperforming the 216,000 survey estimate. Continuing claims dropped to 1,833,000, well below both the prior reading and market expectations, hovering near multi-year lows. When viewed alongside a 13-week moving average that remains below pre-pandemic levels, the data supports an upward trend for the labor force, likely outstripping the tepid job growth averages seen throughout 2025.

The path to a full recovery remains uneven as structural shifts and policy changes create a bifurcated landscape. While the Kansas City Fed Manufacturing Activity index surprised to the upside with a reading of 5 versus 2 expected, goods producers are grappling with renewed uncertainty following the Supreme Court decision on tariffs. Simultaneously, the rapid proliferation of AI agents is beginning to exert visible pressure on service providers most exposed to automation. While these technological advancements and fiscal tailwinds are expected to expand the overall economic pie, the current transition is not rewarding all sectors equally.

Canadian Data/Outlook:

Canadian Q4 GDP declined by 0.2% in the quarter, an annualized rate of negative 0.6%, marking a shift from the growth seen in the previous quarter. This dip was primarily driven by a significant inventory hangover, as businesses pulled back on stock levels following earlier accumulations. However, the headline contraction masks a degree of underlying resilience. While inventories weighed heavy, the economy found support from rising exports, steady government investment, notably in defense, and a surprising 0.4% uptick in household spending.

Despite the quarterly slip, the broader 2025 narrative remains one of modest expansion. The economy grew by 1.7% over the full year, its softest pace since the 2020 pandemic. Much of this cooling can be traced to manufacturing headwinds and shifting trade dynamics with the United States. Yet December offered a glimmer of momentum, with the month alone seeing a 0.2% expansion fueled by a rebound in manufacturing and wholesale trade. This suggests that while the fourth quarter as a whole was sluggish, the engine started to rev again just as the year came to a close.

This performance aligns closely with the Bank of Canada's recent outlook, which has emphasized a soft landing scenario. The data confirms that the four interest rate cuts implemented by the Bank in 2025 are beginning to filter through to the pocketbooks of Canadians. Notably, household interest payments fell by 4.4% for the year. By managing to cool the economy enough to dampen inflationary pressures without triggering a deeper recessionary spiral, the Bank appears to be successfully threading the needle. Early data for January suggests no growth, with Q1 GDP now expected to grow around 1%, below the BoC's official forecast of 1.8%. While the Canadian economy is not firing on all cylinders, the numbers are good enough for the Bank of Canada. As such, no changes to official forecasts are expected.

Fed Watch:

The Federal Reserve is expected to remain on hold at its next policy meeting on March 18, with markets pricing no meaningful rate cuts before July. The persistent nature of price increases, paired with a labor market and consumer base that have shown historical resilience, may force the Federal Reserve to maintain restrictive interest rates for a longer duration. Recent Fed minutes skewed decidedly hawkish, with several participants supporting a two-sided description of the committee's future interest rate decisions. This indicates that if inflation remains at above-target levels, the Fed is prepared to consider upward adjustments to the target range for the federal funds rate, rather than just maintaining or cutting them. Today's hot PPI print reinforces this patient stance.

Technical Picture:

Resistance: 1.3685 (24hr high), 1.3728 (61.8% retracement level that has twice been rejected), 1.3750 (CIBC near-term range top), 1.3779 (trendline serving as pivot for broader downtrend since late November)
Support: 1.3648 (24hr low), 1.3650 (CIBC near-term range bottom), 1.3629 (initial support), 1.3579 (trendline that must break to end corrective rally and reassert downtrend), 1.3482 (2026 low and critical support)
Outlook: The corrective rally since January 30 has twice been rejected at resistance of 1.3728, with a more significant resistance trendline at 1.3779 above serving as the pivot for the broader downtrend in place since late November. Bearish bias remains intact unless 1.3779 trendline breaks, which would generate a bullish trend reversal and shift focus to 1.3856. A bearish breakout below 1.3579 would bring this year's low of 1.3482 back into focus as the next downside target. CIBC strategists expect a near-term band of 1.3650 to 1.3750, with the broader 1.3600 to 1.3900 range favored ahead of USMCA negotiations.

Week Ahead:

The week ahead features a heavy slate of U.S. labor market data that will be critical for assessing the Fed's policy path. Monday brings the ISM Manufacturing PMI, which will provide insight into the goods-producing sector following today's hot PPI print. Tuesday's JOLTS job openings data will offer a read on labor demand. Wednesday's ADP employment change serves as a preview for Friday's full employment report. The ISM Services PMI on Wednesday will be closely watched given the sector's importance to the overall economy. Friday's employment report, including non-farm payrolls, unemployment rate, and average hourly earnings, will be the week's main event. Retail sales data on Friday will provide another read on consumer spending. For USD/CAD, the immediate question is whether today's hot inflation data and Canadian GDP weakness will push the pair back toward support at 1.3650 or if renewed buying interest emerges at current levels.

Other Notes:

• EUR/USD Holds Near 1.18: EUR/USD drifted lower yesterday, unwinding Wednesday's gains that briefly pushed the pair back above 1.18. The cross is still holding above the 50-day moving average, but a downward sloping 21-day continues to cap any sustained move beyond 1.18. With the 21-day at 1.1831 and the 50-day at 1.1771, the pair remains boxed into a narrow range, reflecting investors' reluctance to commit to more directional price action. Another below estimate U.S. weekly jobless claims print reinforced the picture of a steadier labor market. With markets now clearly registering the Fed's focus shifting toward the inflation pillar, still above target, any upbeat labor market data release that helps validate that stance keeps pressure on EUR/USD.
• GBP Tests Key Support Levels: Sterling has nudged back above 1.35, helped more by dollar weakness as markets lean into a bearish USD narrative, driven by rising policy uncertainty and a sense that global investors are trimming U.S. exposure after years of outperformance. The latest BoE testimony offered a clearer read on the policy debate. Governor Bailey repeated that he will go into upcoming meetings asking if a cut is justified, but he also warned he has not seen enough evidence to support an immediate move. With February's inflation data arriving after the March meeting, Bailey may want more confirmation before acting.
• European Commission Sentiment Surveys Disappoint: The European Commission's sentiment surveys disappointed, undershooting forecasts across the economic, industrial, and services components, while consumer sentiment landed on target. Even so, economic sentiment has been improving steadily since the second half of 2025 as businesses grow more optimistic about the 2026 outlook amid anticipated public investment flows.
• Mexican Economy Shows Resilience: The Mexican economy finished 2025 with far more vigor than initially reported as significant upward revisions showed a 0.9% quarterly growth rate in the final quarter. While the 0.6% annual expansion was lower than the 1.4% recorded in 2024, the momentum is undeniable after the third quarter was revised from a contraction to a 0.1% gain. December economic activity proved particularly resilient by jumping 3.3% year over year and 0.4% month over month, prompting analysts to hike their 2026 growth expectations to 1.7%.
• Labour's Loss Weighs on Sterling: The UK's Labour party has suffered a major blow in the Gorton and Denton by-election, where the Green Party secured its first-ever Westminster by-election victory, taking 40.7% of the vote. Reform UK came second with 28.7%, while Labour slumped to third place on 25.4%, overturning what had been a rock-solid Labour seat. The loss has re-ignited speculation over the Labour leadership and has naturally weighed on the pound. GBP/USD slipped back to retest its 200-day moving average near 1.3447, a level that has acted as a key support zone since December.

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.