The Canadian Dollar is holding strong against the US Dollar as the markets digest recent policy changes from the Bank of Canada and the Federal Reserve. Currently, USD/CAD is trading around 1.3760, which is a low not seen since mid-September. This marks a third consecutive weekly decline, mainly due to the overall weakness of the US Dollar. The Bank of Canada has kept its policy rate at 2.25%, which is what many expected. This suggests that interest rates could stay steady until at least 2026. However, some analysts believe there could be increases starting in the fourth quarter of 2026, earlier than the earlier estimate of early 2027.

Potential Economic Indicators

If unemployment falls or inflation stays high, we might see quicker action on interest rates. However, if labor market conditions worsen or there are trade uncertainties related to the USMCA, rate increases could be pushed beyond 2026. On the flip side, the Federal Reserve has lowered interest rates by 25 basis points, adjusting the Federal Funds Rate target to 3.50%-3.75%. Although the Fed did not provide a clear easing path, this decision was less aggressive than many had expected. A key data point to watch is the BoC Consumer Price Index Core, an important measure of inflation due on December 15, 2025. High inflation readings typically strengthen the Canadian Dollar, while low readings may weaken it. The difference in policy between the Bank of Canada and the Federal Reserve is shaping the outlook. The Fed began cutting rates this week, while the BoC remains steady at 2.25%, indicating it may stay there well into 2026. This difference is a major reason why USD/CAD has been declining, and we expect this trend to continue.

Future Currency Expectations

We can expect continued strength in the Canadian Dollar, especially with upcoming inflation data. The next Canadian CPI report comes out on December 15. If core inflation is close to the previous 2.9% level, it will support the BoC’s choice to keep rates steady. Recent job data also showed a drop in the Canadian unemployment rate to 5.7%, giving the BoC little reason to consider easing. Meanwhile, the US Dollar may face challenges. The Fed’s reduction to a 3.50-3.75% range indicates a clear easing cycle, even if some officials are cautious. November’s non-farm payrolls report showed a moderate increase of around 160,000 jobs, supporting the Fed’s view that the economy is cooling enough to lower rates without causing a recession. Next week’s Canadian inflation data provides a significant opportunity. Given the high impact of this report, we anticipate a short-term spike in volatility for USD/CAD. Traders may consider buying at-the-money puts and calls to prepare for a sharp move in either direction following the announcement. For a long-term strategy over the next few weeks, the USD/CAD pair seems likely to go lower. We could consider buying put options on USD/CAD that expire in late January or February 2026. This approach allows us to express a bearish view while managing risk. It’s important to remember how persistent inflation was in 2023 and 2024, which explains the BoC’s current patience. Although US interest rates are technically higher, the market is focused on the direction of change. The gap between US and Canadian rates is expected to narrow as the Fed cuts rates further, which should continue to put downward pressure on the USD/CAD pair. Create your live VT Markets account and start trading now.

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