The Canadian Dollar has steadied against the US Dollar as 2025 ends. Even with low trading volumes during the holiday season, it remains strong after significant gains in late 2025. Interest rate differences between Canada and the US continue to affect the Canadian Dollar. The Bank of Canada has limited options for further rate adjustments after making cuts in 2024 and 2025. Meanwhile, the US Federal Reserve is under pressure to cut rates more quickly in the next two years, which could limit the US Dollar’s gains.

USD/CAD Pair Trends

The USD/CAD pair is currently oversold but is on track for possible lows. It is trading below important moving averages, indicating limited chances for upward movement. Predictions suggest it may extend downward toward the 1.3500 range. Several key factors influence the Canadian Dollar: interest rates, oil prices, economic health, inflation, and trade balance. The Bank of Canada’s decisions are particularly impactful; higher rates generally support the CAD. Oil prices also have a vital role, as they directly affect Canada’s trade balance. Economic indicators like GDP and employment data can also shift the value of the CAD. With low trading volumes during the holidays, this quiet time is a good opportunity to prepare for a stronger Canadian Dollar against the US Dollar in the coming weeks. The main factor driving this shift is the differing paths of the Bank of Canada (BoC) and the Federal Reserve (Fed). The Fed’s target rate is 4.50%, giving it ample room to cut rates, while the BoC is at 2.75% after a series of aggressive cuts in 2024 and 2025. There’s little room for the Bank of Canada to move further since its nine consecutive rate cuts helped control inflation. The latest CPI data from November 2025 showed inflation at 2.5%, comfortably within the bank’s target range of 1-3%. This stability suggests the BoC will maintain current rates, supporting the Canadian Dollar.

US Economy and Rate Cut Outlook

In contrast, the US economy is showing signs of slowing down, with a Q3 2025 GDP growth rate of just 0.8%. This situation puts pressure on the Federal Reserve to start cutting rates in 2026 to prevent a deeper slowdown. Markets expect at least two rate cuts from the Fed next year, which may limit any strength in the US Dollar. Additionally, the loonie gets support from steady oil prices, a crucial export for Canada. West Texas Intermediate (WTI) crude is holding around $85 a barrel, bolstered by OPEC+ decisions to maintain production quotas earlier in the quarter. This stable energy revenue offers strong support for the Canadian currency. While the oversold USD/CAD pair might experience a short technical bounce, any rise toward the 1.3800 level presents a good opportunity to establish short positions. Derivative traders might consider buying put options on USD/CAD or selling futures contracts. Our target for the first quarter of 2026 is a decline towards the 1.3500 support level. Create your live VT Markets account and start trading now.

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