USD/CAD Reversal Risk Builds Ahead of Tariff Deadline

The US-Canada trade tensions are escalating ahead of the 19 August tariff deadline, which could spark a reversal in the USD/CAD pair.

Since early July, the pair has been in a strong downtrend, setting a string of lower highs and lower lows. However, a bullish reversal signal has emerged around a major support zone near the 200-day moving average at 1.3870.

The Canadian data pulse has rebounded strongly, with relative outperformance compared to the US. The country's inflation report delivered a string of upside surprises in July, with headline CPI rising 0.5% for the month and the annual rate reaching 3.0%. The Bank of Canada's median and trimmed mean measures also edged up from 1.9% to 1.95%, broadly in line with the central bank's 2% target.

The expectation is that the Fed will tighten monetary policy, but at a slower pace than previously anticipated, while the BoC is fully priced for a rate hike by year-end. The Canadian upstream producer price inflation data and retail sales data will be released after the tariff deadline, which could provide further insight into the pair's direction.