The USD/CAD pair has stayed above 1.3860, even as the US Dollar weakened overall. Concerns about the US Federal Reserve’s independence have played a role in the Dollar’s slide against other currencies, though the USD/CAD drop from 1.3915 has been limited. A report about a US criminal investigation into Fed President Jerome Powell has raised worries about the Fed’s independence, leading to a decline in the US Dollar. Powell mentioned these actions as unprecedented, hinting at attempts to sway central bank policies.

Impact of Oil Prices

Oil prices have seen a slight drop, which has negatively affected the Canadian Dollar. WTI Oil prices decreased from $59.60 to $58.60. While prices are up 2% since January, they are still 23% lower than the peak in June. The latest US economic data showed positive signs, with a decreasing unemployment rate and better consumer sentiment. On the other hand, Canada’s employment data showed mixed results—job growth was present, but the unemployment rate rose to 6.8%. The Canadian Dollar is impacted by various factors, including the Bank of Canada’s interest rates, oil prices, economic health, inflation, and trade balance. Generally, higher interest rates support the CAD, while changes in oil prices can greatly influence its value. Economic indicators like GDP and employment also play a vital role; a strong economy tends to strengthen the currency. Given the political pressure on the US Federal Reserve, short-term volatility in the US Dollar has increased. However, the USD/CAD’s stability above 1.3860 suggests that weaknesses in the Canadian Dollar are more significant. Derivative traders should note that while the broader US Dollar is soft, this specific pair is not aligning with that trend.

Canadian Economic Outlook

The outlook for Canada’s economy is not very promising, which helps explain the poor performance of its currency. Last week, inflation data for December 2025 revealed that the Consumer Price Index (CPI) cooled to 2.6%, slightly below predictions and moving closer to the Bank of Canada’s target range. Alongside an earlier report showing an unexpected rise in Canadian unemployment to 6.8%, this reduces pressure on the Bank of Canada to keep interest rates high. Additionally, weakness in the energy market continues to affect the loonie. Last week’s EIA report indicated a surprise increase in US crude inventories of over 2 million barrels, causing WTI prices to fall back below $59 and remain far from mid-2025 highs. This ongoing softness in oil prices directly impacts the value of Canada’s exports and investor sentiment regarding the CAD. This creates a noticeable gap in policy direction, with the US economy showing signs of strength while the Canadian economy seems to be slowing. A similar scenario emerged in late 2023 when expectations of tighter Fed policy boosted the US Dollar compared to other central banks. This fundamental backdrop supports a higher USD/CAD exchange rate, despite the political discussions in Washington. Traders should think about strategies that take advantage of this divergence in the coming weeks. Buying USD/CAD call options that expire in February or March could yield potential gains if the pair surpasses its recent peak of 1.3915. Alternatively, those confident in the 1.3860 support could sell cash-secured puts to benefit from the current high volatility. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now