The USD/CAD pair is dropping towards 1.4000 because of rising oil prices, which is helping the Canadian dollar (CAD). Last week, US oil inventories fell by 2.98 million barrels, pushing West Texas Intermediate (WTI) oil prices up to around $57.70 per barrel. The USD/CAD has now fallen for the second day in a row. This comes amid concerns about the US dollar due to delays in economic data linked to the ongoing federal government shutdown, now in its fourth week after a Senate vote failed to approve a funding measure.

Expectations for US Federal Reserve Rates

A recent Reuters poll shows that most economists believe the US Federal Reserve will lower interest rates by 25 basis points in October. Eighty-three analysts expect two rate cuts this year, while thirty-two predict just one. Several factors influence the Canadian dollar, including interest rates, oil prices, economic strength, and trade balance. Higher inflation and good economic data often strengthen the CAD, as they could lead the Bank of Canada to raise interest rates. Key economic indicators like GDP and employment also affect the CAD’s value. The USD/CAD pair is weak, and a decline below the 1.4000 level seems likely. This downward trend results from a stronger Canadian dollar and a weaker US dollar. Our strategy should aim to benefit from this trend leading up to the Federal Reserve’s decision next week. The strength of the Canadian dollar comes from rising oil prices. The recent decline in US oil inventories by 2.98 million barrels supports this trend. Throughout 2024, OPEC+ maintained production discipline, helping stabilize crude prices, which continues to bolster the loonie. As of October 2025, WTI prices around $57.70 make commodity-linked currencies like the CAD more appealing.

Effects of a Fed Rate Cut

On the flip side, the US dollar is weakening because a Fed rate cut on October 29th seems very likely. Data from September 2025 showed that US headline inflation decreased to an annual rate of 3.1%, giving the Fed a good reason to ease its policies during this time of uncertainty caused by the government shutdown. This expectation of looser monetary policy makes holding US dollars less attractive. With this strong directional view, we should consider buying USD/CAD put options that expire in November. This strategy allows us to profit if the USD/CAD drops below 1.4000 while limiting our potential loss to the premium paid for the options. It is a smart way to trade based on the expected catalyst without taking on unlimited risk. We also need to recognize that implied volatility will likely rise as we approach the Fed’s announcement, making options pricier. Historically, volatility increases ahead of significant events and then drops right after. So, timing our entry is crucial to avoid overpaying for our options. The main risk to our negative outlook would be an unexpected move from the Fed, such as a “hawkish cut,” where they reduce rates but hint at no further cuts. This could cause the US dollar to rally sharply, leading to losses for our put options. We will keep a close eye on the Fed’s guidance and the weekly oil inventory reports, as these will be key influences on the pair in the coming weeks. Create your live VT Markets account and start trading now.

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