The US Dollar is gaining strength against the Canadian Dollar, climbing to just over 1.3780 during the European trading hours. This rise comes as the US Dollar rebounds widely, even though recent US labor market data has been weak. In October, US labor reports showed a drop of 105,000 jobs. Surprisingly, November saw an increase of 64,000 jobs. Despite this, the unemployment rate rose to 4.6%, the highest level in four years, and wage growth slowed from 3.7% to 3.5%.

Impact On US Federal Reserve Policy

These results highlight a soft labor market, impacting discussions about potential changes to Federal Reserve monetary policy. While a rate cut in January seems unlikely, there is uncertainty about a possible cut in March. In Canada, Bank of Canada (BoC) Governor Tiff Macklem noted that current interest rates are effective in keeping inflation close to the 2% target. The Consumer Prices Index for November showed inflation steady at 2.2% annually, lower than the expected 2.4%. The Canadian Dollar is influenced by several factors, including BoC interest rates, oil prices, economic health, inflation, and trade balance. The BoC aims to keep inflation between 1-3% by adjusting interest rates, with higher rates often strengthening the CAD. Currently, USD/CAD is testing the 1.3800 level this week, bouncing back from a three-month low around 1.3745. This movement occurs as the US Dollar regains strength overall. The market remains cautious ahead of important data releases.

Market Watch On Inflation Report

The recent US jobs report shows a significant slowdown, with unemployment reaching a four-year high of 4.6%. This weak data pressures the Federal Reserve to consider easing its policy in the upcoming year. Thus, the market is actively discussing a possible rate cut as early as March 2026. On the other hand, the Bank of Canada seems stable, with Governor Macklem stating that the current rates are suitable. The inflation reading of 2.2% supports this balanced stance, as it aligns well with the bank’s target range. The difference in policies creates challenges for USD/CAD. All attention is now on the US Consumer Price Index report due tomorrow. If inflation comes in lower than expected, this would strengthen the case for Fed cuts and could quickly reverse the recent gains in USD/CAD. Conversely, a surprise increase could push the pair higher as traders adjust their rate cut timelines. Another factor supporting the Canadian Dollar is the recent rise in oil prices. WTI crude futures for early 2026 are currently above $82 a barrel, supported by ongoing OPEC+ supply management. This creates strong support for the loonie. Historically, the US Dollar tends to weaken when the Federal Reserve starts to consider rate cuts, especially ahead of other central banks, similar to what we saw in 2019. This trend suggests that the US Dollar may face downward pressure in the medium term. Given the current uncertainty, buying options could be a smart strategy to manage risk. With the potential for significant movement after tomorrow’s inflation data, looking at options strategies makes sense. Buying USD/CAD puts with a strike price below 1.3700 for late January expiration might be a way to prepare for a drop back to recent lows. This strategy allows for capitalizing on a possible decline while controlling maximum risk. Create your live VT Markets account and start trading now.

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