USD/CAD remains under pressure ahead of Canadian GDP and key US data

• USD/CAD slips toward September lows as the US Dollar stays under pressure.
• BoC’s steady policy stance contrasts with Fed easing outlook, reinforcing a bearish bias for USD/CAD.
• Focus shifts to Canadian GDP and a heavy US data calendar due on Tuesday.

The Canadian Dollar (CAD) edges higher against the US Dollar (USD) on Monday amid a softer Greenback. At the time of writing, the pair is trading around 1.3740, down about 0.4% on the day and holding close to September lows.

The US Dollar continues to struggle to stage a meaningful recovery, as expectations for a dovish Federal Reserve (Fed) monetary policy path into 2026 weigh on sentiment. The US Dollar Index (DXY), which tracks the Greenback against a basket of six major currencies, trades around 98.22, retreating after climbing to a one-week high on Friday.

Recent economic data point toward cooling inflation and a softening labor market in the US. Markets are pricing in the prospect of around two interest rate cuts next year, even as the latest dot plot signals only one.

At its December meeting, the Fed lowered the federal funds rate by 25 basis points (bps). Chair Jerome Powell underscored that the future path of monetary policy remains data dependent, adding that the normalization achieved over the past three meetings should help stabilise the labour market while maintaining downward pressure on inflation.

Attention is also focused on a potential leadership change at the Fed, as Chair Jerome Powell’s term is set to end in May 2026. US President Donald Trump has reiterated his preference for a chair who supports lower interest rates. A CNBC report, citing people familiar with the matter, said President Trump is likely to announce his decision as early as the first week of January, a development that could shape expectations around the future pace of easing.

In Canada, expectations are gradually building that the next move from the Bank of Canada (BoC) could eventually be a rate hike. That said, a near-term move appears unlikely. At its latest meeting, the BoC left its policy rate unchanged at 2.25%, noting that the current setting is “about the right level” given inflation running close to target and signs of resilience in economic activity.

The steady policy message reinforced market expectations that interest rates are likely to remain unchanged well into 2026, widening the policy divergence with the Fed and keeping the path of least resistance for USD/CAD tilted to the downside.

Looking ahead, attention turns to a busy data calendar on Tuesday. In Canada, markets will focus on the October Gross Domestic Product (GDP) data. In the US, key releases include the ADP Employment Change (four-week average), the delayed preliminary Q3 GDP report, Durable Goods Orders, Industrial Production, and Consumer Confidence from the Conference Board.