USD/CAD has rebounded from 1.3640 but is unable to surpass 1.3700. A modest increase in Oil prices supports the Loonie, and traders are focused on the upcoming Fed meeting minutes.
Last week, the US Dollar lifted off from five-month lows near 1.3640 against the Canadian Dollar, but any rise remains capped below 1.3700. Meanwhile, the Fed’s December rate cut and a potential future cut continue to affect market expectations.
Fed Meeting Minutes and Market Expectations
The Fed’s meeting minutes will likely display diverse opinions among members, feeding into forecasts of extensive rate cuts expected by 2026. Additionally, President Trump is set to nominate a new Fed Chairman supporting lower rate cuts.
In 2025, the US Dollar has weakened by 20% against the Canadian Dollar due to a softening economic outlook and differing monetary policies between the Fed and the Bank of Canada (BoC). Canada’s main export, Oil, sees a moderate price uptick due to geopolitical tensions, easing concerns of overproduction.
Key factors affecting the Canadian Dollar include BoC interest rates, Oil prices, economic health, inflation, and trade balance. Higher interest rates, rising Oil prices, and strong economic data can bolster the CAD, while the US economy’s health and market sentiment also play roles.
Given the USD/CAD is struggling to stay above 1.3640 and failing at 1.3700, we see this as a temporary pause in a larger downward trend for the pair. The immediate focus is on the Fed’s meeting minutes due out later today, which could confirm the market’s dovish expectations. Any hawkish surprise seems unlikely given recent data.
Impact of US Economic Data on Future Rate Cuts
We believe these minutes will show significant internal debate, reinforcing the view that more rate cuts are coming in 2026. This view is supported by the latest preliminary Q4 GDP figures for the US, which came in at a weaker-than-expected 1.2% annualized growth. This softening economic picture gives the Fed plenty of reason to continue easing policy.
The political pressure from President Trump to appoint a new Fed Chair who favors aggressive rate cuts adds a major long-term weight on the US Dollar. This uncertainty makes it difficult to build a case for any sustained dollar strength heading into the new year. Traders should view any rallies toward 1.3700 as opportunities to position for further downside.
On the other side of the pair, the Canadian dollar is looking relatively strong. November’s inflation data in Canada came in at 2.9%, which is keeping the Bank of Canada from even considering rate cuts for now. This growing policy divergence between a dovish Fed and a steady BoC is a primary driver of USD/CAD weakness.
Support for the loonie is also coming from oil prices, with WTI crude holding firm above $85 a barrel. Ongoing sanctions related to Russia and Iran are limiting global supply forecasts for 2026, putting a solid floor under crude prices. As Canada’s main export, strong oil is a direct positive for the Canadian economy and its currency.
Considering the US dollar has already fallen nearly 20% against the Canadian dollar in 2025, the path of least resistance appears to remain lower. We would advise traders to consider strategies that benefit from this, such as buying put options on the USD/CAD or selling futures on rallies. The next key level to watch on the downside is a break of the recent 1.3640 low.
