The USD/CAD pair is trading above 1.3800 as traders await the Federal Reserve’s decision. The Bank of Canada is likely to keep its interest rate at 2.25%. This steady rate could help support the Canadian Dollar, while swaps suggest a potential 25 basis point increase next year. Since there is no Monetary Policy Report or press conference, the Bank of Canada will probably emphasize that the current rate is fitting for keeping inflation around 2%. The swaps market anticipates a 25 basis point hike to 2.50% within the next year, which may favor the CAD. This decision may determine if USD/CAD stays above or falls below the 1.3800 support level.

Fxstreet Insights Team

The FXStreet Insights Team consists of journalists who gather expert market observations to provide valuable insights and analysis. They cover the Bank of Canada’s interest rate outlook alongside other financial updates. Additional reports focus on various currency and commodity price movements based on expected actions from central banks, such as the Federal Reserve’s anticipated 25 basis point rate cut. The market remains cautious as investors watch for possible policy changes from major central banks. Traders closely monitor various currency pairs, commodities, and cryptocurrencies as markets adjust to upcoming rate announcements and economic reports. Today’s Federal Reserve decision is the key focus, with USD/CAD hovering just above the 1.3800 support level. The tension stems from the Fed’s expected rate cuts compared to the Bank of Canada holding steady at 2.25%. This difference could lead to significant market movements in the next few weeks. We expect a 25 basis point rate cut, marking the fourth reduction of 2025 as the Fed addresses slowing economic growth. Recent CPI data from November indicated that core inflation has eased to 2.8%, providing the Fed with a rationale for this final cut of the year. The main concern is a “hawkish cut,” where the statement may signal an end to the easing cycle, potentially causing the dollar to rally sharply.

Canadian Economy and Derivative Trading

On the other hand, the Canadian economy seems stronger. The latest jobs report from Statistics Canada revealed an increase of 45,000 jobs in November, keeping the unemployment rate stable at 5.2%. This strength explains why the swaps market is predicting a complete 25 basis point hike from the Bank of Canada next year. This underlying support for the loonie indicates that any weakness in USD/CAD could be intensified if the Fed adopts a particularly dovish stance. For derivative traders, this presents a clear opportunity to prepare for increased volatility. Implied volatility on one-week USD/CAD options has surged above 12%, reflecting uncertainty about the Fed’s future guidance. We see potential in strategies like straddles to capitalize on a breakout or purchasing downside puts on USD/CAD to protect against a dovish Fed that breaks the 1.3800 support level. Create your live VT Markets account and start trading now.

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