On Wednesday (August 19) during the European session, the USD/CAD pair encountered selling pressure around 1.3880 after US President Trump announced a three-day pause on tariffs against Canada, and negotiations between Canadian Prime Minister Carney and Trump showed signs of easing. Crude oil prices rose to a near three-week high amid the US-Iran standoff, further supporting the Canadian dollar. The US dollar weakened overall ahead of the FOMC minutes release, contributing to the pair's decline. However, the probability of a Fed rate hike before the end of the year remains close to 68%, and high long-term yields limit the dollar's downside. The market is focusing on the FOMC minutes to explore the extent of policy disagreements within the committee.

The news of a three-day tariff suspension provided a short-term boost to the Canadian dollar.

Following overnight talks with Canadian Prime Minister Carney, Trump announced a three-day suspension of the 50% tariffs on Canada, providing a short-term boost to the Canadian dollar. The tariff threats had previously pressured the Canadian dollar, and the suspension eased market concerns about a sudden escalation in North American trade relations. The Canadian Prime Minister's office confirmed that the two leaders discussed the ongoing negotiations but provided no further details. The three-day suspension window allows both sides time for further consultations, but the tariff risk has not been completely eliminated. Meanwhile, the ongoing US-Iran standoff continues to push oil prices to a near three-week high. As a commodity currency, the Canadian dollar is highly positively correlated with oil prices, and stronger oil prices further supported the Canadian dollar, putting pressure on the USD/CAD pair around 1.3880.

US Dollar: A Tug-of-War Between Cooling Interest Rate Hike Expectations and Inflation Risks

Recent US data has released conflicting signals. Last week's moderate inflation data and slowing consumer spending have prompted investors to reduce their bets on a September rate hike by the Federal Reserve—the CME FedWatch tool shows the probability of a 25 basis point hike in September has fallen to about 35%. Meanwhile, the Fed kept interest rates unchanged at its July meeting, but three officials voted against a rate hike, marking the first time since September 2016 that there was a three-way disagreement. However, the probability of a rate hike before the end of the year remains close to 68%, and the inflationary risks from stronger energy prices may force the Fed to maintain a more hawkish stance. High Treasury yields continue to support the dollar. The FOMC minutes will be a key window for the market to interpret the degree of disagreement within the committee.

Technical Analysis: The 200-day moving average forms key support.

The USD/CAD pair is currently trading around 1.3880, remaining above the 200-day moving average (around 1.3849), suggesting that the broader technical backdrop remains supportive. A decisive break below this level would expose the next relevant support zone at 1.3820-1.3815, followed by the psychological level of 1.3800. Initial resistance is located at 1.3910 (overnight swing high), and a break above this level could extend momentum further towards the psychological level of 1.4000. (USD/CAD daily chart, source: EasyForex)

Summarize

The USD/CAD pair weakened near 1.3880, with Trump's announcement of a three-day suspension of tariffs on Canada providing a short-term boost to the Canadian dollar. This, coupled with oil prices rising to a near three-week high, further strengthened the Canadian dollar. On the dollar side, weak US data has diminished expectations of a September rate hike, but the probability of a rate hike before the end of the year remains close to 68%, and inflationary risks from stronger energy prices may limit the dollar's decline. The FOMC minutes are a key catalyst this week—the degree of disagreement within the committee will determine the short-term direction of the USD/CAD pair. At 15:46 Beijing time on August 19, the USD/CAD pair was trading at 1.3875/76.