USD/CAD consolidates around 1.3700 before heading to New Year eve
- USD/CAD trades sideways around 1.3700 at the start of the last trading day of 2025.
- Fed officials favored further interest rate cuts if inflation declines as expected.
- The BoC is unlikely to cut borrowing rates in the near term.
The USD/CAD pair trades in a tight range around 1.3700 during the Asian trading session on Wednesday. The Loonie pair consolidates at the start of the last trading day of 2025 amid thin trading volume.
As of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, ticks higher to near 98.26, the highest level seen in a week.
The US Dollar (USD) gained sharply on Tuesday, even as Federal Open Market Committee (FOMC) minutes of the December policy meeting showed that most officials supported the need for further interest rate cuts after the December cut if inflation starts cooling down.
“Most participants judged further rate cuts would likely be appropriate if inflation declined over time as expected,” FOMC minutes showed.
The latest Consumer Price Index (CPI) data showed that the headline inflation decelerated to 2.7% year-on-year (YoY) in November from 3% in September.
Meanwhile, the Canadian Dollar (CAD) trades calmly on expectations that the Bank of Canada (BoC) won’t cut interest rates in the near term. The expectations of the BoC leaving rates at their current levels are backed by inflation remaining steady around the 2% target in the last few months.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named 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 during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
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