Major currencies rallied broadly against the U.S. dollar during the trading week of August 17–21, 2026, led by the New Zealand dollar's +1.57% advance. The move was driven by a broad mid-week greenback sell-off on August 19 as markets looked past hawkish Federal Reserve minutes and responded to cooler U.S. economic data. The week's agenda was dominated by three themes: Canada's July inflation acceleration, a surprise contraction in the Australian labor market, and a sharp repricing of expectations for the Federal Reserve's September 16 policy meeting. The repricing illustrated a familiar dynamic in currency markets: exchange rates trade on shifts in expected interest-rate differentials, with traders repositioning away from currencies whose central banks are expected to cut rates and toward those expected to hold rates higher for longer — the lens that framed much of the week's action across the greenback and its major rivals.

Canada: Inflation Accelerates, Bank of Canada Holds a Cautious Stance

Statistics Canada's July CPI report, released during the week of August 17, showed headline inflation accelerating to 3.0% year over year — beating forecasts — driven by surging gasoline and travel costs, while underlying core metrics remained relatively subdued. The Canadian dollar strengthened immediately after the release, pushing USD/CAD down roughly 0.2% to 1.3850 on the day.

Despite the headline beat, Bank of Canada (BoC) policymakers maintain a cautious forward stance. The Governing Council is actively balancing near-term inflationary persistence — driven by upticks in the energy and services components — against emerging downside risks to domestic growth, including softer household consumption and elevated debt-servicing costs.

While the 3.0% year-over-year print temporarily suppresses market expectations for aggressive monetary easing, underlying core metrics (CPI-median and CPI-trim) — the Bank of Canada's preferred core gauges, which exclude extreme price movements in individual components such as gasoline to capture underlying inflation — suggest that broader price pressures continue to moderate toward the 2% target band. In effect, the stronger headline has pushed market expectations for rate cuts further out rather than revived expectations for easing. Money markets are consequently pricing in a higher probability of a prolonged policy hold, with rate-cut projections shifted further out along the yield curve as central bankers await further confirmation of sustained disinflation before committing to additional policy adjustments.

Australia: Labor Market Cools, RBA Caught Between Two Risks

The week's Australian labor force data revealed a surprise cooling in the job market. Headline employment declined by 15,800 jobs in July, significantly missing market forecasts and fully reversing the previous month's gain of 80,000 jobs. The swing from an 80,000-job gain to a 15,800-job loss marked a sharp reversal in labor-market momentum. The contraction was driven entirely by a sharp reduction in part-time roles, which pushed the unemployment rate up to 4.5% — its highest level since late 2021 — and contributed to a 0.6% drop in total hours worked. Part-time employment is among the more volatile components of the monthly labor survey, one reason policymakers typically emphasize the trend over any single month's print.

The Australian dollar (AUD) came under downward pressure immediately after the report, as investors interpreted the data as a sign of a weaker economic environment and the market dialed back expectations for further interest rate hikes from the Reserve Bank of Australia (RBA). That pressure proved short-lived, however: the currency subsequently staged a strong recovery alongside the broader rally against the U.S. dollar later in the week.

The RBA now finds itself navigating a classic monetary policy dilemma — managing a cooling labor market while stickier price pressures persist. Core inflation measures, the trimmed mean and weighted median — the RBA's preferred core gauges, which strip out extreme price moves that can distort the headline — remain elevated at around 3.6%, with headline inflation at 3.8%; both sit above the bank's 2%–3% target band. At the same time, with the unemployment rate creeping up to 4.5% and net job growth turning negative in July, the RBA is constrained from hiking interest rates further without risking a sharper economic downturn. As a result, the RBA is likely to maintain a “higher-for-longer” policy hold at 4.35%.

Federal Reserve: Hawkish July Minutes Meet Cooling Data

The release of the July FOMC meeting minutes revealed a distinctly hawkish division among Federal Reserve officials, highlighted by three dissents in favor of an immediate 25-basis-point rate hike and strong warnings regarding upside risks to inflation. Despite the hawkish rhetoric, the foreign exchange market reacted with broad, modest U.S. dollar selling, as traders largely dismissed the minutes as backward-looking.

Rather than trade on the minutes' tone, investors prioritized subsequent economic data showing cooling inflation and job losses over the Fed's July sentiments, shifting their focus toward upcoming commentary at the Jackson Hole Symposium for clearer forward-looking guidance.

Rate expectations adjusted accordingly. The CME FedWatch tool, which derives market-implied probabilities from the pricing of fed funds futures, shows that the market-implied probability of a 350–375 bps target rate at the September 16, 2026, meeting plunged to a multi-month low near 20% in late July before rebounding sharply throughout August. By August 21, that probability had climbed back toward the 60%–70% range, reflecting shifting interest rate expectations as traders recalibrated the likelihood of a Fed rate cut in response to incoming economic data and central bank communications over the month.

Major Pairs Rally Against the U.S. Dollar

Across the trading week of August 17–21, major currencies rallied sharply against the U.S. dollar, driven by the broad mid-week greenback sell-off on August 19 as markets looked past hawkish Fed minutes toward cooler U.S. economic data.

The New Zealand dollar (NZD/USD) led gains across the board, extending its advance to +1.57% after recovering aggressively from early-week lows. The Australian dollar (AUD/USD) followed with a +1.33% gain, while the euro (EUR/USD) held solid strength at +1.01%. The Canadian dollar (CAD/USD) rose +0.82%, supported by earlier domestic inflation strength, and the British pound (GBP/USD) settled at a +0.80% gain as major pairs maintained their elevated levels heading into the end of the week.

The Week in Review

The week of August 17–21 highlighted diverging monetary policy dynamics and shifting market expectations across major central banks. Canada's headline CPI uptick provided short-term support for the Canadian dollar despite ongoing underlying disinflation, while Australia's cooling labor market, set against persistent core inflation, kept the RBA on a cautious hold. Markets, meanwhile, largely looked past hawkish FOMC minutes and priced in a higher probability of September Fed rate cuts on the back of softer economic indicators — a repricing that drove broad gains across major currency pairs relative to the U.S. dollar. Heading into the following week, attention turns to the Jackson Hole Symposium — the annual conference hosted by the Federal Reserve Bank of Kansas City that has historically served as a venue for signaling shifts in the policy outlook — for forward-looking guidance from the Federal Reserve. Beyond Jackson Hole, the September 16 FOMC meeting, Canada's next inflation releases, and Australia's upcoming labor and price data will provide the next readings on the trends that shaped this week's repricing.

Sources

• Statistics Canada, Consumer Price Indexes:
• Bank of Canada:
• ASX, RBA Rate Tracker:
• Australian Bureau of Statistics, Labour Force Australia:
• CME Group, FedWatch Tool:
• Source article, OANDA MarketPulse: https://www.marketpulse.com/markets/fx-markets-and-central-banks-overview-usdcad-audusd/

This article is based on reporting and analysis published by OANDA MarketPulse. Opinions are the authors' and not necessarily those of OANDA Business Information & Services, Inc. or any of its affiliates, subsidiaries, officers, or directors. The content is for informational and educational purposes only.