The USD/CAD pair extends its three-day recovery move to near 1.3700 during the European trading session on Wednesday. The Loonie pair gains as the US Dollar rises despite most Federal Reserve (Fed) officials stressing the need to loosen monetary conditions further to support deteriorating job market conditions.
Most participants noted moving toward a more neutral policy stance would help forestall possible job market deterioration,” FOMC minutes showed.
In 2025, the Fed has already reduced interest rates by 75 basis points (bps) to 3.50%-3.75% and guided that there will be only one interest rate cut in 2026. On the contrary, the CME FedWatch tool shows that there will be at least 50 basis points (bps) reduction in interest rates by the end of 2026.
Meanwhile, the Canadian Dollar (CAD) trades marginally lower ahead of the New Year eve, with investors remaining uncertain about when the Bank of Canada (BoC) will make any monetary policy adjustment in early 2026.
USD/CAD technical analysis
In the daily chart, USD/CAD trades at 1.3707. The 20-day EMA slopes lower at 1.3772 and caps rebounds, keeping the pair under pressure. Price holds below the average, preserving a bearish tone. RSI at 33.85 remains below the midline, signaling weak momentum after a rebound from oversold.
Downside momentum has moderated as the oscillator lifts, but buyers lack control while the RSI stays sub-50. As long as the pair trades beneath the 20-day EMA, rallies could fade, and the risk would turn to a fresh leg lower. A daily close above the average could temper selling pressure and allow a corrective bounce.
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022.
Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system.
It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
(The technical analysis of this story was written with the help of an AI tool)