Key Takeaways
- The Loonie fell to an 18-month low after Canada’s sharp employment contraction widened the US-Canada yield gap and further reduced expectations for a near-term Bank of Canada rate hike.
- The US dollar remains supported by hawkish Fed expectations, elevated Treasury yields and renewed energy inflation risks, with DXY testing resistance between 102.5 and 103.
- US CPI is the next major test for the dollar, as persistent inflation would reinforce expectations for a December hike while a softer reading could pull yields and DXY lower.
- The euro is heading for a fifth weekly decline as French fiscal stress and widening sovereign spreads outweigh resilient economic data, leaving EUR/USD rallies vulnerable despite stretched technical conditions.
Jobs shock sends Loonie to 18-month low
The Canadian dollar fell sharply on Friday, pushing USD/CAD to an 18-month high of 1.4298 after a severe downside surprise in domestic employment. Canada lost 68,300 jobs in September against expectations for a 10,000 gain, reinforcing the divergence between the Canadian and US economies. The pair’s break above 1.4260 shows how quickly that weaker domestic outlook is being reflected in the pair.
The details offered little reassurance. Employment declined across both full-time and part-time positions, led by 70,000 public-sector job losses concentrated in education and healthcare, while youth employment fell by 48,100. A second consecutive monthly decline erased the year’s employment gains and pushed participation down to 64.8%, its lowest non-pandemic level since 1997. Wage growth accelerated to 2.3%, however, leaving the Bank of Canada with some lingering inflation pressure despite a cooling labour market.
Canadian two-year yields fell to 3.17%, widening the US-Canada spread to a cycle high of 161 basis points and stripping away more of the loonie’s rate support. The implied probability of an October Bank of Canada hike dropped from almost 40% in the middle of the week to 22.9% after the report. Lower oil prices added to the pressure, while the first effects of US tariffs are beginning to appear in the domestic data.
USD/CAD now has room to extend toward 1.44 unless the October 22 inflation report challenges the shift in rate expectations. A soft CPI reading would reinforce the case for the Bank of Canada to remain on hold and could establish a higher trading range above 1.43 ahead of the October 28 Monetary Policy Report. A meaningful upside surprise would be needed to revive near-term hike expectations, narrow the yield gap and support a Canadian-dollar recovery toward 1.41.
Fed, fiscal and oil risks remain supportive
The US dollar is heading for a fourth consecutive weekly gain as hawkish Fed minutes, and renewed energy risks sustain its policy advantage. September’s FOMC minutes showed officials remain concerned that current rates are only modestly restrictive, lifting the implied probability of a December hike to 80%. Treasury yields rose across the curve, with the 10-year reaching 5.25% and the two-year 4.77%, keeping the dollar near three-month highs despite some consolidation following Governor Waller’s more flexible comments on timing.
Renewed attacks on vessels in the Strait of Hormuz added an energy-driven inflation risk as Brent crude approached $104 a barrel. The move in oil fed into Treasury yields by raising concern that another inflation impulse could prolong monetary tightening. President Trump’s decision to rule out strikes on Iran before the November midterms capped the immediate rise in crude but did not remove the supply risk. European fiscal stress has provided another layer of support by keeping EUR/USD under pressure near 1.12.
DXY is consolidating around 102 after clearing its October 1 intraday high of 102.2. The next resistance zone sits between 102.5 and 103, and a sustained break will require more than technical momentum. Monetary policy divergence, Middle East supply risks and European fiscal weakness provide a constructive backdrop, but a close above 103 would be needed to strengthen the case that the dollar has entered a more durable regime.
Next Wednesday’s US CPI report is the clearest catalyst, with annual inflation expected at 3.6%. A firm reading would reinforce December hike expectations and give the dollar another chance to clear resistance, while softer inflation could pull front-end yields lower and expose Waller’s timing caveat. Initial support sits near 101.5. Unless oil prices retreat sharply or inflation slows enough to challenge the Fed’s current stance, the dollar should remain supported into year-end.
Five weekly declines on the trot
The euro has remained under pressure this week, with EUR/USD hovering near its lowest levels since May 2025. While the pair is becoming technically stretched and momentum indicators are moving out of oversold territory, the market’s focus remains firmly on European fiscal risks which show no sign of disappearing any time soon.
Concerns surrounding France’s budget negotiations and debt trajectory continue to dominate sentiment. The widening French-German yield spread, now at its widest since 2012, has revived memories of past eurozone fragmentation episodes and pushed sovereign spreads to the forefront of FX pricing. As a result, investors have become far more sensitive to political developments than to otherwise resilient eurozone growth data.
The ECB is offering limited support. Minutes from September’s meeting showed policymakers concerned about upside inflation risks, but equally aware of the growth implications of tighter financial conditions and elevated bond yields. Importantly, the discussion reflected a more balanced stance than President Lagarde’s post-meeting messaging implied, reinforcing the idea that the bar for further tightening is rising.
For EUR/USD, the key drivers remain energy prices, sovereign spreads and Fed expectations. Until confidence in French assets stabilises and concerns around broader eurozone contagion fade, rallies are likely to remain shallow. The euro may be oversold in the short term, but the underlying narrative remains challenging, leaving the balance of risks tilted lower despite the increasingly stretched technical backdrop.
Market snapshot
Table: Currency trends, trading ranges & technical indicators
Key global risk events
Calendar: October 05 – 09
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
