The Canadian Dollar has dropped in value against the US Dollar after the Bank of Canada (BoC) decided to keep its overnight rate at 2.25%. As of now, USD/CAD is trading at around 1.3861. Traders are now focusing on the Federal Reserve’s upcoming monetary policy announcement. The BoC noted that Canada’s economy grew by 2.6% in the third quarter, mainly due to trade rather than domestic demand. The bank expects GDP growth to slow in the fourth quarter but anticipates a rebound by 2026. Inflation is close to the 2.2% target, with core measures falling between 2.5% and 3%. Governor Tiff Macklem pointed out the impact of US tariffs on Canada’s economy but stressed Canada’s resilience. He stated that keeping the interest rate steady at the lower end helps support the economy during global trade issues. On the other hand, the Federal Reserve is likely to cut its rate by 25 basis points, bringing the Federal Funds Rate down to 3.50%-3.75%. The Bank of Canada manages its monetary policy through interest rates and affects the Canadian Dollar in scheduled meetings. During extreme situations, it uses Quantitative Easing (QE) to boost the economy, though this can weaken the CAD. In recovery phases, Quantitative Tightening (QT) typically strengthens the CAD by stopping asset purchases. There is a clear divide in policy between the Bank of Canada and the Federal Reserve. The BoC is keeping its rate at 2.25% because it sees balanced risks and stable inflation. This is a sharp contrast to the Federal Reserve, which is expected to reduce its rate by 25 basis points later today. The BoC’s cautious approach is backed by recent data. Statistics Canada revealed last week that retail sales fell by 0.5% in October, indicating that consumer spending may be slowing down. This suggests that the BoC might stay cautious for a while longer, likely into 2026. In the U.S., the Fed’s expected rate cut comes as the economy shows signs of cooling. The December 5th, 2025 jobs report indicated that non-farm payrolls increased by only 155,000, falling short of the 180,000 estimates. This provides the Fed the reasoning to make another “insurance cut” to boost growth. For traders in derivatives, the widening interest rate gap suggests continued strength in the USD/CAD pair. Buying call options that expire in January or February 2026 is a solid strategy to benefit from this trend with defined risk. We expect the pair to test the 1.3900 level, potentially moving toward 1.4000 if the Fed indicates more cuts may be ahead. We have seen a similar pattern before in the 2015-2016 period when a rising Fed contrasted with a cautious Bank of Canada. During that time, the USD/CAD pair rose for several months as the gap in policies grew. While the economic factors are different today, the differences between the central banks continue to drive the market.

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