The USD/CAD pair is trading near 1.3700, with the Canadian Dollar experiencing slight selling pressure. The Bank of Canada’s uncertainty over monetary policy adjustments contributes to market dynamics, alongside the anticipation of the FOMC minutes release.
The Canadian Dollar has been outperforming other currencies, due to expectations of stable interest rates from the Bank of Canada. Inflation in Canada has been slightly above the 2% target, influencing the bank’s stance on interest rate changes.
The US Dollar Remains Steady
The US Dollar remains steady as the market awaits insights from the forthcoming FOMC minutes. Last week, the Fed cut interest rates by 25 basis points to a range of 3.50%-3.75%, impacting the USD.
In technical analysis, USD/CAD trades at 1.3692, below its 20-day EMA of 1.3786, maintaining a bearish outlook. The 14-day RSI at 30.69 suggests fading selling pressure, while the 78.6% retracement at 1.3668 offers nearby support.
The Bank of Canada influences the CAD by setting interest rates and managing monetary policy with tools like Quantitative Easing and Quantitative Tightening which affect CAD strength. These measures are utilised to maintain price stability and manage economic recovery.
As we head into the new year, the USD/CAD is attracting interest around the 1.3670 level, a key technical support area. The market is currently experiencing thin holiday liquidity, which can sometimes exaggerate price moves. The main tension for this pair is the clear divergence between an uncertain Bank of Canada and a US Federal Reserve that just cut interest rates.
Optimism for the Canadian Dollar
On the Canadian side, we see persistent strength in the loonie, driven by expectations that the Bank of Canada will hold rates steady into early 2026. This view is supported by recent data, as we saw Canadian inflation for November 2025 hold at a firm 2.4% year-over-year, remaining above the BoC’s target. A surprisingly strong jobs report for that same month, which showed the economy added 45,000 positions, further reduces any pressure on the BoC to consider easing policy.
Meanwhile, the US Dollar is on the defensive after the Federal Reserve’s 25-basis-point rate cut earlier this month. That move was a response to cooling US inflation, with the Fed’s preferred Core PCE gauge dipping to 2.8% in its latest reading for 2025, and signs of a softening labor market. All eyes are now on this week’s FOMC minutes to see just how committed policymakers are to this new dovish stance.
For derivative traders, this setup suggests selling cash-secured puts with a strike price just below the 1.3650 mark could be a strategy to consider. This approach allows us to collect premium based on the view that the 1.3670 support level will hold in the near term. The fading downward momentum, indicated by the RSI indicator turning up from oversold territory, supports this cautious bullishness.
We are also watching implied volatility on short-dated options, which has picked up ahead of the FOMC minutes release on Tuesday. This presents an opportunity for traders who believe the market reaction will be muted, potentially through strategies like short strangles that profit from low volatility. However, any surprisingly hawkish tone from the Fed could quickly unwind the dollar’s recent weakness.
This policy divergence, where the Fed is easing while the BoC holds firm, reminds us of the market environment back in 2019, which led to a sustained period of US dollar underperformance. A decisive break below the 1.3668 support level would signal that bears are still in control. Conversely, a bounce from this area would likely see the pair challenge resistance near the 20-day moving average around 1.3786.
