The USD/CAD pair remains strong around 1.3900, thanks to a stronger US Dollar and steady Federal Reserve policies. The US Consumer Price Index (CPI) rose by 0.3% in December 2025, matching expectations, with a yearly increase of 2.7%. Core CPI, which excludes food and energy, grew by 0.2%, falling short of predictions and keeping annual core inflation at a four-year low of 2.6%. Despite past shutdown distortions, indicators show inflation is easing. Strong Nonfarm Payrolls, a lower Unemployment Rate, and stable ADP Employment Changes highlight a strong US job market. Meanwhile, the Canadian Dollar may benefit from rising Oil prices, with West Texas Intermediate set at about $60.70 per barrel amid geopolitical tensions related to Iran.

The Impact of Oil Prices

The value of the Canadian Dollar (CAD) is influenced by the Bank of Canada’s interest rates, Oil prices, economic health, inflation, and Trade Balance. Higher Oil prices typically support the CAD due to increased demand, while lower prices may diminish its value. Additionally, inflation and economic data impact the CAD by affecting foreign investments and interest rates, with stronger data generally favoring the currency. The USD/CAD pair is holding steady near the 1.3900 level, driven by trends noticed in late 2025. At that time, the market expected the US Federal Reserve to maintain interest rates. This view was supported by a strong US labor market and easing inflation that was not drastically falling. In December 2025, the annual US inflation rate was 2.7% with a core rate of 2.6%. Both figures were lower than those seen in much of 2023, where rates often exceeded 3%. This disinflation, along with strong job reports from late 2025, created a balanced situation for the US dollar. The economy was robust enough to avoid rate cuts, yet inflation was tame enough to prevent rate hikes.

Geopolitical Tensions and Currency Dynamics

The Canadian dollar also benefits from rising oil prices, particularly due to geopolitical tensions in Iran in 2025, which pushed West Texas Intermediate crude prices to around $60.70 per barrel. Past supply concerns, such as shipping attacks in the Red Sea during late 2023, also stabilized oil prices and strengthened the loonie. This scenario creates a rivalry for the currency pair, as a strong US economic outlook contrasts with rising commodity prices that favor Canada. The Federal Reserve’s steady approach supports the US dollar, while energy market risks bolster the Canadian dollar. This fundamental tension indicates potential volatility for the pair. Traders should consider strategies that can thrive on sharp price movements in either direction, as the pair might break out depending on which factor becomes dominant. Options strategies such as straddles or strangles might be useful before key central bank meetings or significant energy news. These strategies can capitalize on increased volatility without needing to predict a specific direction. In the upcoming weeks, we will closely monitor communications from the Bank of Canada for any changes that differ from the Federal Reserve’s stance. The BoC maintained its policy rate at 5% into early 2024, suggesting it is not ready to declare victory over inflation. Any indication that Canadian policymakers are becoming more dovish than their American counterparts could push USD/CAD higher. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now