USD/CAD remains stronger near 1.3900 due to cautious Fed outlook
- USD/CAD rises as the US Dollar strengthens on expectations that the Fed will hold policy steady this month.
- US CPI rose 0.3% MoM in December 2025, matching expectations, while annual inflation held at 2.7%.
- The Canadian Dollar may gain as WTI rises after Trump halted talks with Iran amid ongoing protests.
USD/CAD remains stronger for the second successive session, trading around 1.3900 during the Asian hours on Wednesday. The pair advances as the US Dollar strengthens after US Consumer Price Index (CPI) broadly met expectations, reinforcing views that the Federal Reserve (Fed) will likely hold policy steady this month, even as underlying price pressures showed signs of easing.
US Consumer Price Index increased by 0.3% month-over-month in December 2025, matching market expectations and repeating the rise seen in September. The annual inflation remains at 2.7% increase as expected. Meanwhile, Core CPI, excluding food and energy, rose 0.2% in December, below market expectations, while annual core inflation held at 2.6%, matching a four-year low.
The data provided a clearer sign of easing inflation after earlier releases were skewed by shutdown effects. However, last Friday’s strong Nonfarm Payrolls report, a dip in the Unemployment Rate, and a solid four-week average ADP Employment Change point to a resilient labor market.
The upside of the USD/CAD pair could be restrained as the commodity-linked Canadian Dollar (CAD) may receive support from higher Oil prices. West Texas Intermediate (WTI) Oil price hovers near two-month highs, trading around $60.70 per barrel at the time of writing.
Crude Oil prices advanced after US President Donald Trump halted talks with Iranian officials until protests ease, while voicing support for demonstrators. Ongoing unrest in Iran, coupled with the risk of US involvement, threatens the country’s roughly 3.3 million bpd oil output. Trump also warned that nations continuing business with Iran would face a new 25% tariff, intensifying concerns over potential supply disruptions.
Canadian Dollar FAQs
The key factors driving the Canadian Dollar (CAD) are the level of interest rates set by the Bank of Canada (BoC), the price of Oil, Canada’s largest export, the health of its economy, inflation and the Trade Balance, which is the difference between the value of Canada’s exports versus its imports. Other factors include market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – with risk-on being CAD-positive. As its largest trading partner, the health of the US economy is also a key factor influencing the Canadian Dollar.
The Bank of Canada (BoC) has a significant influence on the Canadian Dollar by setting the level of interest rates that banks can lend to one another. This influences the level of interest rates for everyone. The main goal of the BoC is to maintain inflation at 1-3% by adjusting interest rates up or down. Relatively higher interest rates tend to be positive for the CAD. The Bank of Canada can also use quantitative easing and tightening to influence credit conditions, with the former CAD-negative and the latter CAD-positive.
The price of Oil is a key factor impacting the value of the Canadian Dollar. Petroleum is Canada’s biggest export, so Oil price tends to have an immediate impact on the CAD value. Generally, if Oil price rises CAD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Oil falls. Higher Oil prices also tend to result in a greater likelihood of a positive Trade Balance, which is also supportive of the CAD.
While inflation had always traditionally been thought of as a negative factor for a currency since it lowers the value of money, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Higher inflation tends to lead central banks to put up interest rates which attracts more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in Canada’s case is the Canadian Dollar.
Macroeconomic data releases gauge the health of the economy and can have an impact on the Canadian Dollar. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the CAD. A strong economy is good for the Canadian Dollar. Not only does it attract more foreign investment but it may encourage the Bank of Canada to put up interest rates, leading to a stronger currency. If economic data is weak, however, the CAD is likely to fall.
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