The USD/CAD pair is trading at about 1.3700 as 2025’s last trading day starts, with low activity during the Asian session. This movement matches expectations of US interest rate cuts if inflation falls. The US Dollar Index has increased to 98.26, reaching a weekly high, while the US Dollar made strong gains on Tuesday. Minutes from the Federal Open Market Committee (FOMC) showed broad support for rate cuts if inflation declines further.

Inflation Trends

Consumer Price Index (CPI) data showed that headline inflation slowed to 2.7% in November, down from 3% in September. The Canadian Dollar remains steady as the Bank of Canada is likely to keep interest rates unchanged, with recent inflation stable at 2%. The Federal Reserve adjusts interest rates to manage inflation and employment. They hold eight meetings each year to assess economic conditions. They use quantitative easing (QE) and quantitative tightening (QT) as tools during economic extremes. QE usually weakens the US Dollar, while QT tends to strengthen it. With the USD/CAD pair sitting quietly around 1.3700 during low holiday trading, the key point is the growing difference in central bank policies. The US Federal Reserve is signaling more rate cuts could happen in 2026 if inflation continues to decrease. This is in contrast to the Bank of Canada, which is expected to maintain steady rates for now. As we head into January, the case for a weaker US dollar strengthens. The latest report from the US Bureau of Labor Statistics in December 2025 showed headline inflation easing to 2.7%, nearing the Fed’s target. Accordingly, the CME FedWatch Tool now indicates a greater than 70% chance of another rate cut by the March 2026 meeting.

Canadian Dollar Stability

On the other hand, the Canadian dollar has a more stable outlook. Data from Statistics Canada shows core inflation consistently around the 2% target for the last quarter of 2025. This gives the Bank of Canada little reason to cut rates, supporting the loonie. For derivative traders, this policy divergence hints at a possible drop in USD/CAD. In this quiet market, buying Canadian dollar call options or US dollar put options expiring in February or March 2026 seems appealing. This strategy allows for potential downside with limited risk as trading volumes return to normal. We also see a similar trend emerging in the futures market. The latest Commitment of Traders report from the CFTC, released just before Christmas 2025, showed that speculative net-long positions in the Canadian dollar have been increasing for several weeks. This indicates that larger traders are positioning for Canadian dollar strength against the US dollar. This situation resembles past periods, such as in 2015-2016, when differing monetary policies created lasting trends in currency pairs. As we move beyond the New Year holiday, we expect this theme to drive the pair. Anticipate increased volatility as full market participation resumes in the first full week of January 2026. Create your live VT Markets account and start trading now.

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