The US Dollar has gained a bit against the Canadian Dollar, with the USD/CAD pair moving closer to 1.3700, rising by around 0.20% on Monday. This comes after the pair had been trading near a five-month low at 1.3640, showing only modest demand for the US Dollar at the start of the week, thanks to lower trading volumes. Support for the Canadian Dollar from higher Oil prices is fading. West Texas Intermediate (WTI) Oil is recovering after recent dips, driven by ongoing geopolitical tensions in the Middle East. However, the Canadian Dollar is having a hard time holding onto its gains due to this loss of support.

Dollar Stability Amid Rate Cuts

The US Dollar is holding steady despite overall pressure, as markets expect the Federal Reserve to cut rates by 2026. A 25-basis-point cut was made in December, bringing the target range down to 3.50%-3.75%. In 2025, a total of 75 basis points in cuts were introduced, responding to a cooling job market and inflation above the target level. Attention is now focused on the upcoming Federal Open Market Committee (FOMC) Minutes, which are expected to provide insights into policy discussions and future expectations. The Bank of Canada (BoC) is taking a careful approach, as inflation slightly exceeds the 2% target. These differing policy directions keep USD/CAD in a consolidation phase. With USD/CAD bouncing off recent lows around 1.3640, this appears to be a short-term correction influenced by lower holiday trading volumes. The movement toward 1.3700 is occurring with low trading activity, indicating a lack of strong confidence in the price jump. Traders should be cautious about following this rally, as the broader trend may not have changed. The overall outlook for the US Dollar remains tied to the Federal Reserve’s actions in 2025. We’ve seen 75 basis points in rate cuts this year, directly reflecting a cooling economy. The November Non-Farm Payrolls report showed job growth slowing to 155,000. However, with the latest CPI inflation data from November still at 2.8%, the Fed isn’t rushing, resulting in this near-term stability for the dollar.

Oil Prices and Canadian Dollar Impact

For the Canadian Dollar, the diminishing support from oil prices is significant this week. WTI crude is struggling to stay above $82 a barrel after last week’s government data revealed a smaller-than-expected decrease in US stockpiles, raising demand concerns. Coupled with Canadian inflation remaining steady at 2.9% in November, the Bank of Canada has little reason to shift its cautious position. In light of this situation, traders might consider using options in the coming weeks. A trader could take advantage of the current strength in USD/CAD to buy bearish positions, such as put options with February 2026 expiration dates, anticipating a return to the downtrend once market activity picks up. This strategy allows for betting on a weaker US Dollar in the new year, while keeping upfront risk limited. The upcoming FOMC minutes will be a key event early in 2026. We’ll be watching for any discussions among policymakers that might indicate the pace of future rate cuts. If USD/CAD fails to break and hold above the 1.3720 resistance level in the next few days, it could suggest that this current rebound is weak and that sellers are ready to step back in. Create your live VT Markets account and start trading now.

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