Technically Bearish Momentum Persists
The USD/CAD pair moves higher to about 1.3770 during the early European session. Crude oil price increases following the United States’ capture of Venezuelan President Nicolas Maduro may influence the Loonie against the USD.
The US ISM Manufacturing PMI data will be a key focus today, with the Canadian Ivey PMI report due on Wednesday. Expectations suggest the Ivey PMI might improve slightly to 48.3 in December from 48.2 in November. Strong US data could slow interest rate cuts, supporting the US Dollar.
Technically, USD/CAD holds a negative outlook with the price below the 100-day EMA at 1.3877. Bollinger Bands are narrowing, indicating steadied volatility, while the RSI at 46.01 suggests bearish momentum. Support appears at the Bollinger middle band at 1.3745, with the lower band at 1.3649 providing additional support.
Factors influencing the Canadian Dollar include interest rates set by the Bank of Canada, oil prices, Canada’s economic health, inflation, and trade balance. Decisions by the Bank of Canada affect interest rates and, consequently, the Canadian Dollar. Oil prices impact CAD since petroleum is Canada’s major export, and rising prices generally boost CAD value.
Looking back at the analysis from late last year, the USD/CAD was trading around 1.3770 with a slight bearish technical tilt. As of today, January 5, 2026, the situation has evolved significantly, with the pair pushing towards the 1.3950 level. The key drivers we were watching then have now played out, creating a clearer path for the US dollar’s strength.
Geopolitical and Economic Influences on Forex
The US ISM Manufacturing PMI report for December 2025, which the market was anticipating, came in much stronger than expected at 51.2, signaling a resilient US economy. This has led the Federal Reserve to signal a more patient approach to interest rate cuts in early 2026. This data point alone has been a primary catalyst for the US dollar’s rally against most major currencies.
Conversely, the Canadian Ivey PMI for December missed expectations, printing at 47.9 and highlighting a continued slowdown in the Canadian economy. This divergence in economic performance has been a key theme for us over the past month. The Bank of Canada is now facing more pressure to consider rate cuts sooner than the Fed, widening the policy gap.
While the geopolitical spike in crude oil we saw in late 2025 provided temporary support for the loonie, prices have since stabilized around $82 a barrel as supply fears eased. Canada’s exports of over 3.7 million barrels per day to the U.S. in late 2025 mean oil is still a factor, but it is being overshadowed by the central bank divergence story. For now, oil prices are not providing enough of a tailwind to fight the US dollar’s momentum.
This environment suggests that volatility could increase around key data releases, particularly the upcoming January employment reports for both nations. We believe derivative traders should consider buying volatility, as a surprise in either direction could cause a sharp move. Strategies like long straddles could be effective for capturing a breakout from the current range.
Given the strong upward momentum and supportive fundamentals, we see the path of least resistance as higher for USD/CAD. Buying call options with a strike price around 1.4000 for February expiration offers a defined-risk way to position for further gains. This allows us to participate in the upside while capping our potential downside if sentiment unexpectedly reverses.
Technically, the pair has decisively broken and held above the 100-day EMA, which was cited as resistance near 1.3877 back in December. This technical breakout confirms the shift in fundamental sentiment. Historically, periods of significant Fed and Bank of Canada policy divergence, like what we observed back in 2023, have often led to sustained multi-week trends.
