The USD/CAD pair is trading around 1.3700 as the last trading day of 2025 begins, with limited activity in the Asian session. The pair’s movement aligns with expectations of US interest rate cuts if inflation decreases.
The US Dollar Index rose to 98.26, experiencing a weekly high, while the US Dollar gained significantly on Tuesday. Federal Open Market Committee (FOMC) minutes revealed majority support for rate cuts if inflation declines further.
Inflation Trends
Consumer Price Index (CPI) data indicated headline inflation decelerating to 2.7% in November, down from 3% in September. The Canadian Dollar remains stable as the Bank of Canada is expected to maintain current interest rates, with recent inflation steady at 2%.
The Federal Reserve periodically adjusts interest rates to handle inflation and employment, typically holding eight meetings per year to review economic conditions. Quantitative easing (QE) and quantitative tightening (QT) are tools that the Fed may employ during economic extremes, with QE generally weakening the US Dollar and QT positively impacting its value.
With the USD/CAD pair sitting quietly around 1.3700 in thin holiday trading, the key takeaway is the growing split in central bank policy. The US Federal Reserve is signaling more rate cuts are likely in 2026 if inflation continues to cool. This contrasts with the Bank of Canada, which we expect to keep rates steady for now.
The case for a weaker US dollar is getting stronger as we head into January. The latest report from the US Bureau of Labor Statistics in December 2025 showed headline inflation easing to 2.7%, bringing it closer to the Fed’s target. Reflecting this, the CME FedWatch Tool indicates markets are now pricing in a greater than 70% chance of another rate cut by the March 2026 meeting.
Canadian Dollar Stability
On the other hand, the Canadian dollar has a more stable foundation. Recent data from Statistics Canada showed core inflation holding firmly around the 2% target for the last quarter of 2025. This gives the Bank of Canada little reason to consider cutting rates, providing underlying support for the loonie.
For derivative traders, this policy divergence suggests setting up for a potential drop in USD/CAD. Given the quiet market, buying Canadian dollar call options or US dollar put options with February or March 2026 expiries looks attractive. This allows us to position for downside with limited risk as trading volumes return to normal.
We can see a similar sentiment building in the futures market. The latest Commitment of Traders report from the CFTC, released just before Christmas 2025, showed that speculative net-long positions in the Canadian dollar have been building for several consecutive weeks. This indicates that larger players are already positioning for CAD strength against the USD.
This setup is reminiscent of past periods, like in 2015-2016, where diverging monetary policies created sustained trends in currency pairs. As we move past the New Year’s holiday, we anticipate this theme will become the primary driver for the pair. Expect volatility to pick up as full market participation resumes in the first full week of January 2026.
