After the “risk-managed” rate cut: the slow grind of the US dollar and the patience of the Canadian dollar
2025-09-18 20:16:06
On Thursday (September 18), the USD/CAD exchange rate initially rose before declining, paring gains in pre-market trading and stabilizing around 1.3780. This was driven by two factors: first, the dollar's consolidation after Wednesday's sharp fluctuations; second, the continued evolution of Canada's latest interest rate decision and employment signals. The market's focus is currently on the US initial jobless claims data (covering the week ending September 12), which will be released at 8:30 PM.
On the dollar: On Wednesday, the FOMC lowered the federal funds target range by 25 basis points to 4.00%-4.25%. Chairman Powell characterized this move as a "risk management" rate cut, citing recent labor market weakness. The dot plot indicates that most officials favor two more rate cuts in 2025, with only one expected in 2026. Following the decision, the US dollar index initially dipped before rebounding: it rebounded strongly from a new low of 96.20, briefly approaching 97.30, before retreating to around 97. This combination of "first dovish, then stabilizing" has shifted the dollar's short-term trajectory to an event-driven one, entering a period of renegotiation based on subsequent data.
Data: The market consensus is that initial jobless claims will fall to 240,000 this week, down from the previous reading of 263,000. The previous reading of 263,000 was a four-year high, significantly reinforcing market bets on easing. If this decline materializes, the interest rate path could be rebalanced to a "marginal tightening," providing temporary support for the US dollar. If it falls short of expectations, the US dollar could retreat again, benefiting risk-on assets and commodity currencies.
Canadian Dollar: The Bank of Canada also cut interest rates by 25 basis points to 2.5% on Wednesday, emphasizing its openness to further easing amid weak employment, sharply declining exports, and inflation broadly near its 2% target. In terms of forward pricing, derivatives curves offer two slightly different "probability charts": one predicts a total of approximately 19 basis points of further easing this year, with a roughly 60% probability of no change in the October rate decision; the other, the swap market prices an 80% probability of another 25 basis point cut this year, potentially to 2.25% by year-end, with some weighting for a further cut to 2.00% over the next 12 months. The common thread between these two scenarios is that expectations of gradual easing on the Canadian dollar side remain intact.
Overall: The Federal Reserve and the Bank of Canada have both entered a moderate rate-cutting phase, albeit at different paces and scales. The US dollar still has a larger reserve of rate cuts than its major peers, making the decline more likely to be a gradual process rather than a one-sided decline. In the short term, initial jobless claims data will determine the direction of the US dollar and, in turn, the range of USD/CAD.
On the daily chart, the middle Bollinger Band is at 1.3811, the upper Bollinger Band is at 1.3899, and the lower Bollinger Band is at 1.3722. The exchange rate is currently fluctuating in a narrow range around 1.3775, generally within the mean reversion zone, below the middle band and above the lower band. This corresponds to a sideways trend and declining volatility after a rapid rise.
In terms of price structure, the recent failed attempt to reach 1.3924 led to a pullback, reaching a low of 1.3725, forming a dynamic and static resonance support with the lower band of 1.3722. The earlier interim low at 1.3539 defined the bottom of the upward channel that has existed since June of this year. If the 1.3720-1.3900 range is defined, the current price is located in the lower quartile of the range, indicating a tug-of-war between bulls and bears above the lower band and below the moving average.
At the indicator level: MACD is slightly negative near the zero axis, and the histogram is converging, indicating low-level fluctuations after the kinetic energy has weakened. RSI (14) is approximately 47.74, in a neutral to slightly weak range, and does not give an overbought or oversold signal. Combined with the convergence of the Bollinger Band width, the short-term technical characteristics are more consistent with "Bollinger Band Squeeze - Direction Undetermined".
Support and Resistance: Initial targets below are 1.3722/1.3725 (lower Bollinger band/recent low) and the high trading volume zone of 1.3685-1.3690, with the key low of 1.3539 as the next target. Above, watch for 1.3811 (middle Bollinger band/mean magnetic level), 1.3899 (upper Bollinger band), and 1.3924 (recent high). Until 1.3811 is effectively recaptured, the mean pressure remains. A close above the middle band on strong volume would trigger a breakout, signaling a "mean shift up + bandwidth expansion" pattern.
Since the beginning of this week, the US dollar has been shifting direction and retreating rapidly—a characteristic typically associated with sentiment indicators that are "sensitive but not extreme." Risk appetite in the equity market briefly rebounded on the eve of the resolution before returning to neutral. This translates to a convergence of marginal gains for commodity currencies in the foreign exchange market.
Specifically for USD/CAD, implied volatility at the option level has not seen a sustained increase, and risk reversals have not significantly shifted to one side, which echoes the convergence of the Bollinger Bands. Traders are more likely to adopt event-driven swing trading and mean reversion strategies rather than trend following. Fear and greed remain balanced in this instrument, with the market's sentiment anchored between 1.3720 and 1.3810.
Another source of sentiment is the expectation gap: If initial claims fall significantly to 240K or even lower, the market will interpret Wednesday's "neutral rate cut" as a "data-driven rebalancing," providing short-term support for the US dollar. If the data falls short of expectations, or even approaches the four-year high of 263K, the confidence of US dollar bulls will be further weakened, and funds may temporarily shift to high-beta currencies and gold-related assets. On the Canadian dollar side, since the Bank of Canada has stated that it will "continue to observe and review the situation meeting by meeting," the market is already fully expecting "another, but not abrupt, rate cut," making sentiment less resilient than the data shock.
Fundamentals: The two central banks cut interest rates one after another, and data became the key to "secondary pricing"
On the dollar: On Wednesday, the FOMC lowered the federal funds target range by 25 basis points to 4.00%-4.25%. Chairman Powell characterized this move as a "risk management" rate cut, citing recent labor market weakness. The dot plot indicates that most officials favor two more rate cuts in 2025, with only one expected in 2026. Following the decision, the US dollar index initially dipped before rebounding: it rebounded strongly from a new low of 96.20, briefly approaching 97.30, before retreating to around 97. This combination of "first dovish, then stabilizing" has shifted the dollar's short-term trajectory to an event-driven one, entering a period of renegotiation based on subsequent data.
Data: The market consensus is that initial jobless claims will fall to 240,000 this week, down from the previous reading of 263,000. The previous reading of 263,000 was a four-year high, significantly reinforcing market bets on easing. If this decline materializes, the interest rate path could be rebalanced to a "marginal tightening," providing temporary support for the US dollar. If it falls short of expectations, the US dollar could retreat again, benefiting risk-on assets and commodity currencies.
Canadian Dollar: The Bank of Canada also cut interest rates by 25 basis points to 2.5% on Wednesday, emphasizing its openness to further easing amid weak employment, sharply declining exports, and inflation broadly near its 2% target. In terms of forward pricing, derivatives curves offer two slightly different "probability charts": one predicts a total of approximately 19 basis points of further easing this year, with a roughly 60% probability of no change in the October rate decision; the other, the swap market prices an 80% probability of another 25 basis point cut this year, potentially to 2.25% by year-end, with some weighting for a further cut to 2.00% over the next 12 months. The common thread between these two scenarios is that expectations of gradual easing on the Canadian dollar side remain intact.
Overall: The Federal Reserve and the Bank of Canada have both entered a moderate rate-cutting phase, albeit at different paces and scales. The US dollar still has a larger reserve of rate cuts than its major peers, making the decline more likely to be a gradual process rather than a one-sided decline. In the short term, initial jobless claims data will determine the direction of the US dollar and, in turn, the range of USD/CAD.
Technical aspects:
On the daily chart, the middle Bollinger Band is at 1.3811, the upper Bollinger Band is at 1.3899, and the lower Bollinger Band is at 1.3722. The exchange rate is currently fluctuating in a narrow range around 1.3775, generally within the mean reversion zone, below the middle band and above the lower band. This corresponds to a sideways trend and declining volatility after a rapid rise.
In terms of price structure, the recent failed attempt to reach 1.3924 led to a pullback, reaching a low of 1.3725, forming a dynamic and static resonance support with the lower band of 1.3722. The earlier interim low at 1.3539 defined the bottom of the upward channel that has existed since June of this year. If the 1.3720-1.3900 range is defined, the current price is located in the lower quartile of the range, indicating a tug-of-war between bulls and bears above the lower band and below the moving average.
At the indicator level: MACD is slightly negative near the zero axis, and the histogram is converging, indicating low-level fluctuations after the kinetic energy has weakened. RSI (14) is approximately 47.74, in a neutral to slightly weak range, and does not give an overbought or oversold signal. Combined with the convergence of the Bollinger Band width, the short-term technical characteristics are more consistent with "Bollinger Band Squeeze - Direction Undetermined".
Support and Resistance: Initial targets below are 1.3722/1.3725 (lower Bollinger band/recent low) and the high trading volume zone of 1.3685-1.3690, with the key low of 1.3539 as the next target. Above, watch for 1.3811 (middle Bollinger band/mean magnetic level), 1.3899 (upper Bollinger band), and 1.3924 (recent high). Until 1.3811 is effectively recaptured, the mean pressure remains. A close above the middle band on strong volume would trigger a breakout, signaling a "mean shift up + bandwidth expansion" pattern.
Market Sentiment Observation
Since the beginning of this week, the US dollar has been shifting direction and retreating rapidly—a characteristic typically associated with sentiment indicators that are "sensitive but not extreme." Risk appetite in the equity market briefly rebounded on the eve of the resolution before returning to neutral. This translates to a convergence of marginal gains for commodity currencies in the foreign exchange market.
Specifically for USD/CAD, implied volatility at the option level has not seen a sustained increase, and risk reversals have not significantly shifted to one side, which echoes the convergence of the Bollinger Bands. Traders are more likely to adopt event-driven swing trading and mean reversion strategies rather than trend following. Fear and greed remain balanced in this instrument, with the market's sentiment anchored between 1.3720 and 1.3810.
Another source of sentiment is the expectation gap: If initial claims fall significantly to 240K or even lower, the market will interpret Wednesday's "neutral rate cut" as a "data-driven rebalancing," providing short-term support for the US dollar. If the data falls short of expectations, or even approaches the four-year high of 263K, the confidence of US dollar bulls will be further weakened, and funds may temporarily shift to high-beta currencies and gold-related assets. On the Canadian dollar side, since the Bank of Canada has stated that it will "continue to observe and review the situation meeting by meeting," the market is already fully expecting "another, but not abrupt, rate cut," making sentiment less resilient than the data shock.
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