On Tuesday (July 28) during Asian trading hours, the USD/CAD pair traded sideways after hitting a two-week high of 1.4128, currently hovering around 1.4115. Falling crude oil prices to a one-week low, coupled with the Bank of Canada's dovish stance, continued to weigh on the commodity currency, providing fundamental support for the exchange rate. However, bulls remained cautious ahead of Thursday's FOMC decision, with the market awaiting policy signals from the Federal Reserve to determine its next move.

Low oil prices and a dovish stance from the Bank of Canada pose a double headwind for the Canadian dollar.

The Canadian dollar currently faces two major headwinds: First, low oil prices: Crude oil prices have fallen to a one-week low, directly impacting the terms of trade for Canada, a major oil exporter. Diplomatic progress following the US-Iran ceasefire has pushed oil prices lower, and the weakness in the energy sector is eroding key fundamental support for the Canadian dollar. Second, the Bank of Canada's dovish stance: Market expectations that the Bank of Canada will maintain interest rates unchanged for the remainder of 2026 continue to solidify, creating a policy divergence with rising expectations of a Federal Reserve rate hike, further narrowing the Canadian dollar's interest rate advantage. The combination of these two factors provides solid support for the USD/CAD exchange rate above 1.41, offering a fundamental basis for further appreciation.

DBS Bank says investors will not repric interest rates until there are clear signals.

The market's focus is firmly on Wednesday's FOMC decision. While the market widely expects the Fed to keep interest rates unchanged, the policy statement and Chairman Warsh's press conference are the real highlights—the market will meticulously analyze the wording to determine the policy path in September and beyond. DBS Bank's research team observed that the market has been fluctuating recently due to news surrounding the US-Iran conflict. From an interest rate perspective, DBS Bank noted: "With the FOMC meeting imminent, we believe investors are unwilling to lower their interest rate expectations until clearer policy signals emerge, even though oil prices are correcting." This means that even if lower oil prices alleviate some inflation concerns, the market will not substantially repric its expectations for dollar interest rates before the FOMC decision. The dollar index is holding steady near its monthly high. While the US-Iran ceasefire has limited further upside for the dollar, it has not triggered a systemic sell-off—the market is awaiting policy signals from the Fed.

The USD/CAD exchange rate is highly dependent on three major variables.

The recent USD/CAD exchange rate has been highly dependent on three key factors. If the Federal Reserve's FOMC decision is more hawkish than expected, the dollar's interest rate advantage will be further strengthened, pushing the USD/CAD pair above the key resistance level of 1.4150, putting significant pressure on the Canadian dollar. Simultaneously, if international oil prices remain low, the Canadian dollar, as a commodity currency, will continue to be pressured; conversely, a rebound in oil prices could provide the Canadian dollar with some breathing room, easing downward pressure. Furthermore, a breakdown in US-Iran diplomatic negotiations and escalating geopolitical risks would prompt safe-haven funds to flow back to the US dollar, further consolidating its strength. In summary, the Canadian dollar is currently struggling with the dual predicament of weak oil prices and policy uncertainty, and a trend reversal is unlikely in the short term.

Two scripts for Canadian dollars

The USD/CAD pair is hovering near a two-week high, supported by both low oil prices and a dovish stance from the Bank of Canada. As a commodity currency, the Canadian dollar lacks independent upward momentum in the current environment—falling oil prices erode terms of trade, and the Bank of Canada's inaction weakens interest rate differentials. The short- to medium-term direction depends on two major variables: the hawkishness of the FOMC decision will determine whether the US dollar can break out of its current range; and the trend of oil prices will determine whether the Canadian dollar can gain a fundamental respite. Until the Fed's policy signals become clearer, USD/CAD is more likely to consolidate within the 1.4050-1.4200 range. For traders, Wednesday's FOMC decision is the real highlight of the week—before that, any directional bets may face two-way risks. (USD/CAD daily chart, source: EasyForex) At 11:15 Beijing time on July 28, the USD/CAD exchange rate was 1.4115/16.