USD/CAD Market Update

USD/CAD Firms to 1.3720 – Thursday, March 19, 2026

Current Level: Mid-1.37s (24hr range 1.3706–1.3748)

USD/CAD is trading near 1.3720 on Thursday morning, gaining 16 pips from the previous session as the pair consolidates in the mid-1.37 range following yesterday's central bank meetings. The Bank of Canada held its overnight rate at 2.25 percent for the third consecutive meeting, while the Federal Reserve maintained its benchmark rate at 3.50 to 3.75 percent. Both central banks acknowledged the inflation risks from elevated energy prices but signaled patience in their policy responses. The U.S. dollar maintains a firm tone as safe-haven demand persists amid ongoing geopolitical tensions, while the Canadian dollar faces pressure despite elevated oil prices that continue to reflect supply concerns from the Middle East conflict.

Market Overview:

Risk appetite remains cautious this morning as traders assess the policy signals from yesterday's central bank meetings. Equity markets are trading mixed, with investors weighing persistent geopolitical risks against hopes for eventual de-escalation in the Middle East. The U.S. dollar shows modest strength across the G10 basket as safe-haven flows continue, though the move is muted following the Fed's cautious stance. Global bond yields remain elevated as markets reassess inflation trajectories following the recent surge in energy prices. Oil prices hold near current levels as the Middle East conflict continues, with Iranian strikes on Qatari and Saudi energy infrastructure escalating supply concerns and inflation risks.

Bank of Canada Holds at 2.25 Percent, Signals Conditional Patience:

The Bank of Canada held its overnight rate at 2.25 percent for the third consecutive meeting, as expected. The decision came with a notable shift in language, as the Bank removed the statement that the current policy rate remains appropriate. This signals less certainty about their current neutral stance and potentially more openness to changing the benchmark rate sooner if conditions warrant. CPI eased to 1.8 percent in February from 2.3 percent in January, with core measures close to 2 percent. However, sharp rises in global energy prices from the Middle East conflict will likely push inflation higher in coming months.

Governor Macklem stated during the press conference that Governing Council will look through the immediate impact of the war on inflation, but if energy prices stay high, the Bank will not let their effects broaden and become persistent. The BoC expects modest growth as the economy adjusts to U.S. tariffs and trade uncertainty, but recent data suggest near-term growth will be weaker than anticipated in January. The labour market shows persistent slack, removing near-term pressure for rate increases but not precluding hikes if inflation becomes sticky. RBC Economics assigns a 50 percent probability that the BoC remains on hold throughout 2026, with a hiking cycle beginning in 2027. The market is pricing in approximately 34 basis points of hikes by year end.

Federal Reserve Holds Rates, Inflation Concerns Mount:

The Federal Reserve left its benchmark interest rate unchanged at the current range of 3.50 to 3.75 percent, marking the second consecutive hold decision. The vote was 11 to 1, with Governor Miran dissenting in favor of a 25 basis point rate cut. The decision was in line with expectations, with traders reducing their expectations of rate cuts in 2026 over the past two weeks due to geopolitical tensions and the rise in oil prices and associated inflation risk. The dot plot continued to show a median expectation of a 25 basis point cut in 2026 and another 25 basis point cut in 2027, although the balance of projections moved toward fewer rate cuts, with more members forecasting just one rate cut from two previously.

The updated Summary of Economic Projections showed a slightly faster growth and inflation outlook. Core PCE inflation for 2026 was revised up to 2.7 percent from 2.5 percent. GDP growth for 2026 was upgraded to 2.4 percent from 2.3 percent in December. Unemployment rate projections remained unchanged at 4.4 percent for 2026, reflecting a stable labor market. During the press conference, Powell indicated he thinks it is important to keep rates mildly restrictive at the moment, and indicated that a rate cut will not occur until further progress is made on inflation. He noted that the series of supply shocks, including tariffs and oil prices, have interrupted past progress in this regard. The market is now pricing in only 58 percent probability of a rate cut by the Fed this year, down from a full rate cut that was priced in yesterday.

Energy Infrastructure Attacks Escalate Supply Concerns:

Oil and natural gas benchmarks surged globally following Iranian strikes on Qatari and Saudi energy infrastructure, escalating supply concerns and inflation risks. The attacks are dampening risk appetite and strengthening the U.S. dollar as investors seek safe havens. Market reports suggest prolonged conflict could sustain elevated energy prices and significantly dampen economic growth across major economies, eroding investor confidence. Iranian missiles struck Qatar's Ras Laffan Industrial City, home to the world's largest LNG facility, in response to Israel's attack on Iran's South Pars gas field. Saudi Arabia reported ballistic missile debris landing near a Riyadh oil refinery. The escalating attacks on regional energy assets drove oil prices to $110 and pushed European gas prices up 6 percent to 54 euros per megawatt hour, as markets brace for potential further strikes on energy infrastructure.

Central Bank Policy Stuck in Wait and See Pattern:

The wait and see pattern in North American central banks will dictate policy outlook in the near future. The reality is that we are six weeks away from the next Fed meeting, and there is nothing but uncertainty on how things could unfold in the very next few days. For how long policy gets stuck will depend on the duration and degree of the U.S. and Iran conflict. The February PPI did not help. Final demand rose 0.7 percent month over month and 3.4 percent year over year, with core at 3.9 percent year over year, hot prints that landed into a worsening Middle East backdrop. Brent surged above $109 as Israel struck Iran's upstream South Pars gas field and Iran flagged Gulf energy targets, prompting precautionary evacuations at Samref and Jubail.

For the U.S. dollar, that mix is supportive. Even as officials maintained a highly cautious outlook, projecting just one quarter point rate cut for 2026 and another for 2027, the greenback firmed after the press conference as futures still hesitate to price a cut before the fourth quarter. Most importantly, the U.S. dollar index remains highly tethered to headlines out of Iran. Near term, dips likely stay shallow until shipping, storage, and insurance conditions around Hormuz improve and the conflict premium fades, something current news flow does not yet allow. A further leg up in the USD hinges on energy and volatility flaring again, but with policy stuck, inflation not fading broadly, and risk premia elevated, the balance of risks keeps the dollar bid on setbacks.

Canadian Dollar Faces Two-Sided Oil Test:

The Canadian dollar faces a two-sided oil test as higher crude supports national income and royalties, yet it also squeezes households through fuel and food. The net macro impact depends on duration and pass-through. The global picture is severe, with the IEA describing unprecedented disruption around Hormuz, which amplifies price volatility and complicates the forecast. The likely message from the BoC is steady policy with a firmer warning on upside inflation risks from energy, paired with a reminder that the Bank will adjust if core pressures broaden or expectations drift. If the oil shock proves brief, the control range and flexible horizon allow the Bank to tolerate a temporary headline bump while monitoring real income effects and credit conditions. If disruption endures, guidance can tighten quickly, but as in past episodes the Bank will seek evidence of persistence before changing course.

The notion of CAD exceptionalism, with oil support cushioning the Loonie, should be challenged amid broad USD strength and softer domestic data. Even a de-escalation driven risk-on turn would likely see CAD lag higher-beta G10 rebounders once the conflict premium fades. That view aligns with a BoC hold at 2.25 percent and guidance that tolerates a temporary headline bump while stressing that any policy shift hinges on core breadth and expectations, not the crude tape, keeping near-term USD/CAD choppy and headline driven. In practice, CAD should keep tracking oil headlines but stay range-bound if the Bank maintains a measured hold and the market continues to reward the dollar's geopolitical role. Only when supply lanes normalize and domestic data improve should the mean-reversion map translate into more durable CAD gains.

Euro Remains Under Pressure from Energy Vulnerability:

The euro came under renewed pressure yesterday as Iran escalated threats to key energy assets in the Gulf following Israel's strike on the South Pars gas field. Oil prices climbed on the headlines. Markets appear to be parsing Iran's stance more acutely than Washington's, with Trump's earlier comment that the war may be ending in the near future barely registering, while Iran's warnings stuck. After all, Iran holds the greater leverage over energy markets through its de facto control of the Strait of Hormuz. Reignited pressure on government yields across the eurozone underscores how sensitive curves remain to geopolitics, reversing some of the early week normalisation ahead of a heavy central bank calendar, while blurring the pass-through into FX.

A muted reaction from the euro to today's ECB meeting is expected. While the Bank will likely acknowledge the upside risks the conflict poses to inflation, it is expected to remain non-committal. Although updated staff projections will be released, it is unlikely that any conflict-related inflation impulse will be incorporated, at least not in the March round. One may argue that risks for the euro tilt to the downside. The market is currently pricing almost two full 25 basis point hikes, and any acknowledgment by Lagarde of risks to the growth outlook would temper a more hawkish market bias, triggering an unwind. That said, FX sensitivity to rate differentials has deteriorated sharply since the conflict began, and the knee-jerk hawkish repricing lacks substance at this early stage, with little clarity on the macro implications, meaning the euro is unlikely to move much even if some of that hawkishness is unwound after the meeting.

Bank of England Faces Difficult Balancing Act:

The Bank of England meets today in a completely different world to the one it faced just a month ago. Before the Middle East war erupted, the path was straightforward. The labour market was cooling, inflation was on track to hit target by April, and the MPC had narrowly held rates in a 5 to 4 split that all but teed up a cut in March or April. Markets were effectively debating the timing, not the direction. That narrative has been overturned. The UK is among the most energy-sensitive economies in the G7, and the surge in oil and gas prices has forced a wholesale reassessment of the inflation outlook. The war has rendered previous forecasts obsolete, and the expected disinflation path has been replaced by a renewed risk that CPI remains above target into 2026.

The MPC will hold today, as the shock is too recent and the uncertainty too high, but the communication will be closely scrutinised. Policymakers must balance two conflicting realities: a softening domestic economy, with rising youth unemployment and increasingly cautious private sector hiring, and an external inflation shock that the Bank cannot ignore. The question is whether the MPC chooses to look through the energy spike, as it arguably did in 2011, or treat it as a more durable inflation risk, as in 2022. The truth likely lies between the two. For sterling, this backdrop creates a two-way risk. The aggressive repricing in UK yields has supported GBP against European FX, but the broader terms of trade shock still argues for caution. A hawkish tone today could give the pound a tactical lift, yet sustained upside requires the energy shock to fade.

Canadian Data/Outlook:

Canada has no major economic data releases today, with the focus remaining on yesterday's Bank of Canada policy decision. The central bank held the overnight rate at 2.25 percent and removed language stating the current policy rate remains appropriate, signaling less certainty about their current neutral stance. Markets anticipate approximately 34 basis points of hikes by year end, pricing driven mostly by the recent surge in gas prices and energy concerns. However, policymakers must weigh these rising costs against domestic economic struggles, including the weak jobs report from last Friday that showed a loss of 84,000 positions in February. The unemployment rate surged to 6.7 percent, with the participation rate dipping to 64.9 percent. RBC Economics assigns a 50 percent probability that the BoC remains on hold throughout 2026, with a hiking cycle beginning in 2027. With USMCA negotiations approaching, the Canadian dollar remains vulnerable to weakness should tensions with the United States escalate, though elevated oil prices have provided offsetting support in recent sessions.

Fed Watch:

The Federal Reserve held rates at 3.50 to 3.75 percent yesterday in an 11 to 1 vote. What came out from the press conference was a central bank unsure that policy is meaningfully restrictive, even as its cautious dot plot and modestly higher forecasts signal little appetite to ease. Powell hinted that monetary policy under supply shocks works less under current circumstances, with policy sitting near the line between restrictive and not. Markets heard the ambiguity and pushed the easing path further out, not because growth looks strong, but because the Fed has less room to respond cleanly, given the high level of uncertainty. The market is now pricing in only 58 percent probability of a rate cut by the Fed this year, down from a full rate cut that was priced in before yesterday's meeting. RBC Strategists expect the Fed Funds range will remain at the current 3.50 to 3.75 percent range through 2026. The oil price shock from the Iran conflict adds a dimension to the Fed's inflation challenge that may force the central bank to remain restrictive even as growth weakens.

Technical Picture:

Resistance: 1.3728 (potential triple top, has capped rallies on three occasions), 1.3856 (initial upside target), 1.3932 (early January double top)
Support: 1.3706 (24hr low), 1.3598 (corrective rally low), 1.3550 (1 to 3 month target), 1.3504 (2026 low), 1.3482 (2026 low)
Outlook: USD/CAD is in a three week consolidation range between 1.3482 and 1.3728, with a downtrend trendline from late November sitting just below at 1.3718. A daily close above 1.3728 would end the multi-month downtrend and resolve consolidation to the upside. Upside targets include 1.3856 initially, then 1.3932. A break higher would prompt an increase to the current 1 to 3 month technical target, now at 1.3550. Conversely, a daily close below 1.3598 would end the corrective rally and bring 2026 lows back into focus at 1.3504 and 1.3482. The pair continues to gravitate toward the 1.3700 area as markets await directional catalysts from the duration of the Middle East conflict.

Week Ahead: