The USD/CAD pair has been decreasing sharply for the second week in a row. In mid-January, buyers tested the resistance level at 1.3920 (the lower boundary of the Kumo cloud on the W1 timeframe), while sellers are now approaching the 34 figure. Notably, the downward trend in USD/CAD is due not only to the weakening of the US dollar but also to the strengthening of the Canadian dollar. For example, on Thursday, the US Dollar Index is trying to recover, while the USD/CAD pair continues to plunge.

The Bank of Canada played a significant role in this. The Canadian events remained overshadowed by American ones — all market attention was focused on the January meeting of the Federal Reserve, where the central bank kept the interest rate unchanged but also expressed softer comments on the (overly optimistic) expectations of most traders. Fed Chairman Jerome Powell noted the high inflation but indicated that future interest rate decisions would depend on US employment dynamics. If the NFP reports signal a cooling labor market, the central bank will resort to easing monetary policy.

It is evident that most market participants expected to hear more hawkish statements, considering the acceleration of the core PCE and PPI indices, as well as the stagnation of the CPI (both core and overall). Therefore, the greenback reacted coolly to the Fed's January meeting results.

On the other hand, the Canadian dollar has strengthened its position across the market, reacting to the results of the Bank of Canada meeting. Judging by the loonie's reaction, most analysts anticipated a softer tone from the central bank and hints of a resumption of the easing cycle. However, the central bank not only kept the interest rate unchanged but also delivered a "moderately hawkish" message. In particular, the central bank stated that inflation risks remain, the fight against inflation is "not over," and it is "too early" to discuss a potential easing of policy. Such signals contrasted with market expectations, leading to increased demand for the Canadian dollar.

It is worth reminding that, according to data released last week, the overall consumer price index in Canada accelerated to 2.4% (after rising to 2.2%), while the core CPI rose to 2.8% (against a forecast of 2.6%). Moreover, the December report is notable for its structure, not just the "green" appearance of the headline figures. For instance, the acceleration of the overall CPI was due to a broad base of price increases: pressures were sustained not just in one or two volatile components, but across several key segments. Core inflation metrics remain above the target level, reflecting persistent domestic factors (especially concerning the services sector and everyday expenses). This configuration suggests that the spike is not random (seasonal): inflation is "deeply embedded" in economic dynamics.

Meanwhile, the unemployment rate in Canada remains relatively stable, and labor force participation is elevated, mitigating the risk of a sharp weakening of the labor market.

This combination of fundamental factors allows the Bank of Canada to maintain a wait-and-see position. Following the January meeting, the Canadian central bank made it clear that it intends to remain on pause in the foreseeable future – at least concerning the upcoming meetings.

Further support for the Canadian dollar comes from the oil market, which is rising amid increasing geopolitical tensions. In particular, the price of Brent oil exceeded the $70 mark on Thursday– the first time since September of last year. March WTI oil futures on the New York Mercantile Exchange rose to nearly $65 ($64.68) per barrel.

The oil market reacted to Trump's statement that the United States could launch an airstrike on Iran. In response, Tehran promised a "crushing response" to any attack. In particular, the deputy commander of the IRGC's naval forces threatened to close the Strait of Hormuz. As is known, this is a vital transportation artery for global trade. Tehran has repeatedly threatened to close this strait but has never done so, even after American military attacks on Iranian facilities last year.

However, as the saying goes, fear has big eyes: oil quotes are rising, providing strong support for the Canadian dollar, as Canada is a major exporter of oil.

Thus, the current fundamental backdrop is likely further to drive the downward trend in USD/CAD.

This is also supported by technical analysis. The loonie is in a pronounced downward trend, as confirmed by the Ichimoku indicator, which has formed its bullish "Parade of Lines" signal on both the daily and weekly charts. Additionally, prices on the "higher" timeframes (H4, D1, W1, MN) are located between the middle and lower lines of the Bollinger Bands, which are in an expanded channel. The trend indicators are confirmed by the MACD oscillator, which is in the overbought area. The nearest support level (the first target for the downward movement) is the Bollinger Bands line on the four-hour chart (1.3470). The main target is 1.3350 (the upper boundary of the Kumo cloud on the MN timeframe).