**Bearish Momentum Continues** The USD/CAD pair is climbing to around 1.3770 early in the European session. Crude oil prices are on the rise after the U.S. captured Venezuelan President Nicolas Maduro, which may strengthen the Loonie against the USD. Today’s main focus is the U.S. ISM Manufacturing PMI data, while the Canadian Ivey PMI report is expected on Wednesday. Analysts predict a slight increase in the Ivey PMI to 48.3 in December, up from 48.2 in November. Strong U.S. economic data could delay interest rate cuts, which would support the U.S. Dollar. From a technical perspective, USD/CAD has a negative outlook since the price is below the 100-day EMA at 1.3877. The narrowing Bollinger Bands show reduced volatility, and the RSI at 46.01 indicates bearish momentum. Support is at the Bollinger middle band at 1.3745, with the lower band at 1.3649 providing additional backing. Several factors affect the Canadian Dollar, including the Bank of Canada’s interest rates, oil prices, Canada’s economic state, inflation, and trade balance. Decisions from the Bank of Canada directly impact interest rates and, in turn, the value of the Canadian Dollar. Oil prices are crucial for CAD since petroleum is Canada’s main export, and rising oil prices typically boost its value. Looking back at our analysis from late last year, USD/CAD was near 1.3770 with a slight bearish tilt. As of January 5, 2026, the situation has changed notably, with the pair nearing the 1.3950 level. The previously monitored factors have now played out, revealing a clearer direction for the U.S. dollar’s strength. **Geopolitical and Economic Influences on Forex** The anticipated U.S. ISM Manufacturing PMI report for December 2025 surprised markets by coming in strong at 51.2, indicating a resilient U.S. economy. This has led the Federal Reserve to adopt a more cautious approach to interest rate cuts in early 2026, significantly boosting the U.S. dollar against other major currencies. On the other hand, the Canadian Ivey PMI for December fell short of expectations, landing at 47.9 and showing ongoing weakness in the Canadian economy. This disparity in economic performance has been a major theme recently. The Bank of Canada now faces pressure to consider rate cuts sooner than the Fed, widening the gap in monetary policy. While the recent spike in crude oil prices temporarily supported the Loonie, prices have stabilized around $82 a barrel as supply concerns eased. Canada’s oil exports of over 3.7 million barrels per day to the U.S. remain important, but the central bank divergence narrative has taken priority. Currently, oil prices aren’t providing sufficient support to counter the U.S. dollar’s strength. This environment hints that volatility might rise around key data releases, especially the upcoming January employment reports for both countries. We recommend that derivative traders consider buying volatility, as surprises in either direction could lead to sharp moves. Strategies like long straddles could effectively capture a breakout from the current range. Given the strong upward momentum and favorable fundamentals, we believe the path of least resistance is upward for USD/CAD. Buying call options with a strike price around 1.4000 for February expiration offers a defined-risk approach to position for further gains. This strategy lets us take part in potential upside while capping our losses if market sentiment shifts unexpectedly. From a technical viewpoint, the pair has firmly broken above the 100-day EMA, which was a resistance level near 1.3877 in December. This breakout confirms a shift in fundamental sentiment. Historically, significant divergences in Fed and Bank of Canada policies, like those observed in 2023, have often led to prolonged trends. Create your live VT Markets account and start trading now.

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