The USD/CAD pair is trading close to 1.3700, with the Canadian Dollar facing some selling pressure. Uncertainty from the Bank of Canada about changes in monetary policy is affecting the market, along with the anticipation of the FOMC minutes release. The Canadian Dollar has been stronger compared to other currencies because people expect the Bank of Canada to keep interest rates steady. Inflation in Canada has been slightly above the target of 2%, which is influencing the bank’s decisions on interest rates.

The US Dollar Remains Steady

The US Dollar is steady as the market waits for the upcoming FOMC minutes. Last week, the Federal Reserve lowered interest rates by 25 basis points to a range of 3.50%-3.75%, which affects the USD. In technical analysis, USD/CAD is at 1.3692, below the 20-day EMA of 1.3786, suggesting a bearish outlook. The 14-day RSI is at 30.69, indicating decreasing selling pressure, while the 78.6% retracement level at 1.3668 provides nearby support. The Bank of Canada impacts the CAD by setting interest rates and managing monetary policy through tools like Quantitative Easing and Quantitative Tightening. These actions are intended to ensure stable prices and support economic recovery. As we approach the new year, the USD/CAD pair is drawing interest around the 1.3670 level, a significant technical support point. The market is dealing with thin holiday liquidity, which can lead to exaggerated price movements. The main challenge for this pair is the clear difference between the uncertain Bank of Canada and a US Federal Reserve that has recently cut interest rates.

Optimism for the Canadian Dollar

On the Canadian side, the loonie remains strong, with expectations that the Bank of Canada will keep rates stable into early 2026. This view is backed by recent data showing Canadian inflation for November 2025 at a solid 2.4% year-over-year, above the BoC’s target. Additionally, a surprisingly strong jobs report for that month indicated the economy added 45,000 jobs, further easing any pressure on the BoC to change policy. Meanwhile, the US Dollar is under pressure following the Federal Reserve’s 25-basis-point rate cut earlier this month, a reaction to declining US inflation. The Fed’s preferred Core PCE gauge shows inflation at 2.8% for 2025, amid signs of a softening labor market. Everyone is now looking at this week’s FOMC minutes to gauge how committed the Fed is to this new dovish approach. For derivative traders, a potential strategy is to sell cash-secured puts with a strike price just below 1.3650. This strategy allows us to collect premium based on the expectation that the 1.3670 support level will hold in the short term. The slowing downward momentum, shown by the RSI moving up from oversold levels, supports this cautious optimism. We are also monitoring implied volatility on short-dated options, which has increased ahead of the FOMC minutes release on Tuesday. This could provide an opportunity for traders who believe that the market’s reaction will be muted, potentially using strategies like short strangles that benefit from low volatility. However, any unexpectedly hawkish comments from the Fed could quickly reverse the dollar’s recent weakness. This divergence in policy, where the Fed is easing while the BoC stays firm, reminds us of the market conditions in 2019 that led to a prolonged period of US dollar underperformance. A significant drop below the 1.3668 support level would indicate that sellers are still in control. On the other hand, a bounce from this level could push the pair to challenge resistance near the 20-day moving average around 1.3786. Create your live VT Markets account and start trading now.

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