USD/CAD hovers around 1.3685 as traders await the FOMC minutes release. The Fed indicated a single interest rate cut by 2026, while the BoC is expected to maintain current rates in the near term.
USD/CAD remains stable near 1.3685 during late Asian trading on Tuesday. The pair consolidates prior to the FOMC December meeting minutes in the upcoming New York session.
US Dollar Index Analysis
The US Dollar Index (DXY) fluctuates around 98.00, near its 12-week low of 97.75. The FOMC minutes will be scrutinised for insights on monetary policy.
The Fed’s recent policy meeting resulted in a third consecutive 25 basis point rate cut, reducing rates to 3.50%-3.75%. Only a single rate cut by 2026 was signalled.
The Canadian Dollar shows mixed performance against major currencies in a low-volume week. Prospects for CAD have improved with the BoC unlikely to reduce interest rates soon.
USD/CAD’s technical outlook remains steady at 1.3685. The 20-day EMA is trending lower at 1.3777, with bearish momentum reflected by the 14-day RSI at 30.6.
Market Sentiment Analysis
A continued price drop below the 20-day EMA may extend losses to 1.3543 if it falls below 1.3640.
Given the current flatness around 1.3685, we see the market digesting the policy divergence between the US and Canada. The Federal Reserve has signaled a very slow pace for future rate cuts, while the Bank of Canada is expected to hold firm. This fundamental difference supports a continued downward trajectory for the USD/CAD pair in the coming weeks.
The case for a stronger Canadian dollar is bolstered by recent economic data that was not available a few weeks ago. Canada’s latest employment report for November 2025 showed a net gain of 45,000 jobs, crushing expectations and pushing the unemployment rate down to 5.6%. This strength reinforces the view that the BoC has no immediate reason to consider easing its policy.
On the other hand, recent US data continues to paint a softer picture, justifying the Fed’s dovish stance. The final Q3 2025 US GDP revision came in at 1.9%, slightly below the initial estimate, and recent consumer confidence numbers have dipped heading into the new year. This economic cooling keeps a lid on the US dollar’s potential for any significant rally.
We must also factor in the price of crude oil, a key driver for the commodity-linked Canadian dollar. WTI crude has recently stabilized above $86 per barrel, supported by winter demand forecasts and continued OPEC+ supply discipline. Looking back at the price action in early 2023, we saw how sustained oil strength above $80 consistently provided a tailwind for the loonie.
For derivative traders, this environment suggests that buying USD/CAD put options expiring in February or March 2026 could be a prudent strategy. A break below the key 1.3640 support level would be the trigger, with an initial price target of 1.3543. This approach allows traders to capitalize on the expected downside while strictly defining their maximum risk.
Alternatively, for those with a less aggressive view, selling out-of-the-money call spreads could be effective. By setting the short strike above the 20-day EMA resistance near 1.3777, traders can profit from time decay and the pair’s inability to stage a meaningful rally. This strategy is attractive in a market that we expect to grind lower rather than crash.
