The Canadian Dollar (CAD) is facing challenges due to trade issues and expectations around monetary policy. Concerns about US tariffs related to Canada’s ties with China have created market uncertainty, even with assurances from Canadian officials. While severe trade actions are not likely right now, the Loonie remains sensitive to political news.

Monetary Policy Expectations

The Bank of Canada is expected to maintain steady interest rates. Analysts will pay close attention to the Bank’s statements for clues on how it balances trade risks with the domestic economy. US economic data, particularly on growth and inflation, will also influence USD/CAD movements and could affect the Federal Reserve’s policies. Recently, the CAD has slowed after a strong performance against a declining US Dollar. Although the US Dollar’s weakness has been beneficial for the Loonie, there’s still resistance around the 1.3600 mark. Market conditions suggest that rapid gains are unlikely in the near future. Several factors influence the CAD, including the Bank of Canada’s interest rates, oil prices, trade balance, and overall market sentiment. The economic stability of both Canada and the US also plays a crucial role. If inflation rises, the Bank might adjust rates, which could attract more investments and strengthen the CAD. Currently, the Canadian Dollar is navigating trade uncertainties and expectations around central bank policies. Increased risks from US tariff talks have raised headlines, even as officials attempt to manage the discussion. For traders, this political environment likely means that implied volatility on USD/CAD options will remain high, providing chances to profit from price swings.

Interest Rates and Inflation

Both the Bank of Canada and the Federal Reserve are expected to keep interest rates steady this week, but their messaging is crucial. Canada’s latest inflation rate from December 2025 was 2.9%, slightly higher than the 2.6% core inflation reported in the US. This small difference could make the Bank of Canada more cautious about future rate cuts than the Fed, potentially putting pressure on the USD/CAD pair to rise. We should also consider oil prices, which provide support for the Loonie. West Texas Intermediate (WTI) crude has been holding steady above $82 per barrel, thanks to OPEC’s production discipline in the latter half of 2025. This stability in energy prices should help prevent significant weakness in the Canadian Dollar in the upcoming weeks. From a technical standpoint, USD/CAD has found support around the 1.3700 level. Recent data shows that speculative net short positions against the Canadian Dollar increased by over 15,000 contracts in the last quarter of 2025. This crowded position suggests a risk of a quick reversal; any positive news about Canada could rapidly push USD/CAD down towards the 1.3600 level. Create your live VT Markets account and start trading now.

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