Forex News

• USD/CAD rebounds from intraday lows as a stronger US Dollar and softer Canadian Retail Sales weigh on the Loonie.
• Oil-driven gains fail to support the Loonie amid safe-haven demand for the US Dollar.
• BoC and Fed keep interest rates unchanged, maintaining a cautious policy stance amid rising inflation risks.

USD/CAD recovers from intraday lows on Friday as softer-than-expected Canadian Retail Sales data weighs on the Canadian Dollar (CAD), while a rebound in the US Dollar (USD) provides additional support to the pair.

At the time of writing, USD/CAD is trading around 1.3735, rebounding from an intraday low near 1.3699. Meanwhile, the US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, is trading near 99.74, recovering after falling about 1.10% on Thursday.

Data released by Statistics Canada showed that Retail Sales rose by 1.1% MoM in January, rebounding from a 0.4% decline in December, but falling short of the 1.5% market expectation. Meanwhile, Retail Sales excluding Autos increased by 0.8%, also missing forecasts of 1.2%, and improving from December after being revised to 0.0% from 0.1%.

Although the January Retail Sales data predates the recent surge in Oil prices driven by the war in the Middle East, the softer-than-expected print suggests domestic demand was already losing momentum. This adds to concerns that rising energy costs could further weigh on consumption in the months ahead.

Bank of Canada (BoC) Governor Tiff Macklem said in Wednesday’s monetary policy announcement, after leaving the benchmark interest rate unchanged at 2.25%, that it is too early to assess the full impact of the conflict on Canada’s economic growth. However, he cautioned that elevated energy prices could squeeze household budgets, leaving consumers with less income to spend on other goods.

At the same time, Macklem noted that if higher Oil prices are sustained, they could support income from energy exports, given that Canada is a net exporter of Oil.

However, since the eruption of the US-Israel war with Iran, the resulting surge in Oil prices has failed to provide meaningful support to the commodity-linked Loonie, as traders increasingly seek safety and liquidity in the US Dollar amid heightened geopolitical uncertainty.

Meanwhile, fading Federal Reserve (Fed) rate-cut bets also underpin the Greenback. The Fed kept its benchmark interest rate unchanged at 3.50%–3.75% on Wednesday, while highlighting risks to both sides of its dual mandate. However, the updated dot plot still points to one rate cut in 2026, even as policymakers revised their inflation forecasts higher.

Nordea’s Sara Midtgaard reports that the Federal Reserve left its policy rate unchanged and signalled only gradual easing, with one 25 bp cut projected in both 2026 and 2027. She notes Powell’s emphasis on data dependence and geopolitical uncertainty, and Nordea’s base case that the Fed keeps rates on hold over the next two years with no rush to cut.

Fed projects very gradual future easing

"The Federal Reserve kept its policy rate unchanged in the 3.5-3.75 percent range, broadly in line with expectations. The updated projections signal only gradual easing, with the median forecast implying one 25 bp rate cut in both 2026 and 2027, broadly unchanged from the projections published in December."

"He (Fed Chair Powell) also noted that policymakers would not cut rates unless there is clear progress in bringing inflation back towards target. The current geopolitical situation in the Middle East increases uncertainty around both inflation and economic activity, meaning the Fed stands ready to adjust policy if incoming data warrant it."

"We still expect the Fed to keep rates on hold over the next two years, and based on recent signals, they do not appear to be in any rush to cut rates in the near term."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)

Citing officials, the Wall Street Journal reported on Friday that the Pentagon is sending roughly "2,200 to 2,500 Marines from the California-based USS Boxer amphibious ready group and 11th Marine Expeditionary Unit," to the Middle East, alongside three warships.

Market reaction

Markets remain risk-averse following this headline. At the time of press, the Nasdaq Composite was down 1.2% on the day, while the S&P 500 was losing about 0.8%.

In the meantime, the US Dollar Index clings to small daily gains above 99.60 but remains on track to end the week in negative territory.

Scotiabank’s global FX strategy team reports broad Dollar strength as G10 performance realigns with early US/Iran conflict patterns. They stress fragile risk sentiment as markets reassess prolonged conflict risks, central bank paths and violent yield repricing. Oil benchmarks diverge, while Copper and Gold show signs of technical stabilization after recent swings.

Dollar firm as conflict risk repriced

"The USD is ending the week with broad strength as the G10 currencies return to a relative performance distribution that mirrors the early stages of the US/Iran conflict."

"This week’s attacks on major Iranian gas fields and critical Qatari LNG export facilities have left markets and policymakers contending with the increasing possibility of a lengthened conflict and an even more protracted timeline for repairing the damage that is still being done."

"Yields are up materially over the past few days with exceptionally violent moves in the UK, as markets responded to Fed caution and an increasingly qualified dovishness, a decidedly hawkish ECB, and an unexpectedly aggressive U-turn from the BoE."

"For the Fed, the shift is one of fading expectations for easing where fed funds futures are now pricing very little in terms of policy changes in either direction though September 2027."

"Returning to markets, the prices of oil have diverged somewhat with WTI showing signs of stabilization in the mid-$90/bbl range as Brent—the global benchmark—has seen a renewed rally on the back of the latest escalation in tensions with a push toward $100/bbl."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)

Scotiabank’s Analyst Team notes the Canadian Dollar is modestly firmer versus the Dollar and leading G10 peers, echoing its earlier conflict-phase outperformance. They highlight narrowing yield spreads and a relatively muted Bank of Canada meeting as key drivers. Markets price about 60 bps of BoC tightening by year-end, leaving CAD sensitive to policy shifts, with fair value estimates near 1.34.

CAD leads G10 as policy repriced

"The CAD is entering Friday’s NA session with modest support against the USD and notable strength against all of the G10 currencies, exhibiting the singular traits that characterized much of its performance through the early phase of the US/Iran conflict."

"We continue to see critical CAD support (USDCAD resistance) at the lower bound of the local range, driven by a renewed narrowing in yield spreads."

"Markets are currently pricing about 60bpts of tightening by year end but very little for the next two meetings, leaving the CAD somewhat vulnerable to adjustment if the BoC were to follow the pacing currently signaled by the BoJ and ECB."

"In terms of our FV estimate, it has taken a renewed tumble to the low 1.34s at 1.3413, reflecting the latest narrowing in yield spreads."

"USDCAD looks to have once again failed at breaking the upper bound of the local range from late January, with a clear reinforcement of resistance in the mid-1.37s."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)

• EUR/GBP edges higher on Friday, recovering from prior losses as markets digest ECB and BoE policy decisions.
• ECB and BoE kept rates unchanged on Thursday and highlighted rising inflation concerns.
• Traders weigh diverging inflation outlooks and policy flexibility between the ECB and BoE.

EUR/GBP edges higher on Friday, recovering losses recorded in the previous day after the European Central Bank (ECB) and Bank of England (BoE) monetary policy announcements. At the time of writing, the cross trades near 0.8647, remaining confined within a narrow range that has defined price action for more than a week.

The Euro (EUR) outperforms the British Pound (GBP) on Friday as traders anticipate the ECB could raise rates sooner than expected, even as markets price in multiple rate hikes by the BoE.

Both the ECB and the BoE kept interest rates unchanged at 2% and 3.75%, respectively, on Thursday, while highlighting rising inflation risks driven by higher Oil and energy prices amid the ongoing US-Israel war with Iran.

The ECB said it is not pre-committing to any specific rate path and will base decisions on the inflation outlook and related risks, while the BoE offered limited forward guidance, stating it “stands ready to act as necessary to ensure that inflation remains on track to meet the 2% target in the medium term.”

The ECB’s latest projections point to increasing uncertainty in the economic outlook. For 2026, growth is seen at 0.9% in the baseline scenario, slowing to 0.6% under the adverse scenario and 0.4% in a severe scenario.

At the same time, inflation is projected to rise to 2.6% in the baseline, accelerating to 3.5% in the adverse case and 4.4% in the severe scenario, highlighting the risk of weaker growth alongside stronger price pressures.

Meanwhile, the BoE also revised its inflation outlook higher, expecting the Consumer Price Index (CPI) to average around 3% in Q2 2026, up from 2.1% in its February projections.

Both the Eurozone and the UK are net energy importers, meaning higher Oil and energy prices can push inflation higher while weighing on economic growth, raising stagflation risks. However, the ECB appears relatively better positioned, with inflation still close to its 2% target. In contrast, UK inflation remains above the BoE’s target, reducing the scope for aggressive rate hikes to counter an Oil-driven inflation shock.

Markets now fully price an ECB rate hike by July and another by year-end, with some analysts pointing to a possible move as early as April. In the UK, markets are pricing in more than two BoE rate hikes this year, with roughly a 50% chance of an April hike.

ECB Governing Council member Gabriel Makhlouf said on Friday that “two rate hikes are part of the ECB’s baseline scenario,” adding that “if facts point to action, the ECB will take action.” Meanwhile, Madis Müller noted that “a rate hike may be appropriate if inflation is persistent,” while Bundesbank President Joachim Nagel said the ECB “would need an April hike if the price outlook sours.”

Christopher Waller, a member of the Federal Reserve (Fed), said that based on the jobs report alone, he was planning to dissent in the monetary policy decision, but inflation has become more of a concern. He added that he now expects labor force growth to be near zero in a live interview with CNBC on Friday.

Key takeaways

Based on the jobs report was planning to dissent, but since then, inflation has become more of a concern.

Also now expects labor force growth to be close to zero, which changes the breakeven level of job growth.

Zero job growth does not seem "normal," but that is what the math may indicate will keep the unemployment rate stable.

If oil stays high for months on end at some point it bleeds into core inflation.

A high and persistent oil shock would not have a transitory impact on inflation.

Cannot "look through" a large and persistent oil shock; at this point caution is warranted.

Want to wait and see how this evolves before deciding on rate cuts for later this year.

Is making progress on taming structural inflation, which may be close to 2% now but is held higher by tariffs.

Do not think there is a need to consider rate hikes.

Market pricing has not shown a de-anchoring of expectations, investors understand inflation will drop as tariffs roll off.

If tariff effects don't roll off by second half of year it will be tricky.

A shock of the right sort could push companies to start cutting labor.

Consumer outlook could also be damaged with gas prices rising.

No reason to make bank reserves scarce just to reduce the balance sheet.

Proposals to change demand for reserves, and allowing the balance sheet to shrink, is a good topic for study and discussion.

If there are losses in private credit it is a bunch of firms and rich people.”

• USD/JPY advances after a sharp pullback, supported by a rebound in the US Dollar.
• The Bank of Japan maintains a hawkish bias but remains cautious amid economic risks.
• Expectations of a Fed pause support the Greenback in a context of global uncertainty.

USD/JPY trades around 158.70 on Friday at the time of writing, up 0.61% on the day, staging a clear rebound after Thursday’s sharp decline. The move comes as the US Dollar (USD) regains traction following a bout of volatility, with markets reassessing the outlook for US monetary policy.

Support for the Greenback is driven by expectations of a prolonged pause from the Federal Reserve (Fed). The central bank kept rates within the 3.50%-3.75% range and highlighted elevated uncertainty linked to geopolitical tensions, while fewer policymakers now anticipate rate cuts this year. According to the CME FedWatch tool, markets largely expect rates to remain unchanged through year-end, underpinning the US Dollar (USD).

In this context, the US Dollar Index (DXY) rebounds toward the 99.50 area, reflecting renewed demand for the US currency. Analysts at BBH note that energy shock-related stress and Middle East tensions are supporting the USD, driven by increased liquidity demand during periods of financial stress. MUFG shares this view, arguing that rises in Oil prices could further extend the US Dollar’s gains.

On the Japanese side, the Bank of Japan (BoJ) maintained a hawkish stance, helping to limit downside pressure on the Japanese Yen (JPY). Governor Kazuo Ueda stated that a rate hike remains possible if the economic slowdown linked to Middle East tensions proves temporary. However, the central bank warned about uncertainty surrounding growth, particularly due to rising energy costs.

Meanwhile, the geopolitical backdrop remains a key driver. Escalating tensions involving the United States (US), Israel and Iran continue to fuel risk aversion, which could typically support the JPY as a safe-haven asset. In the near term, however, monetary policy divergence and the resilience of the USD dominate the pair’s direction.