The USD/CAD pair is under slight pressure, hovering around the key support level of 1.4400, as the US Dollar (USD) trades in a subdued manner due to low market liquidity. As the year draws to a close, traders are navigating light trading conditions, with market participants largely absent ahead of the New Year holidays. The US Dollar Index (DXY), which tracks the performance of the Greenback against a basket of six major currencies, is struggling to maintain its momentum around the 108.00 mark.
Despite the modest decline of the USD on Monday, it is poised to finish the year with a 6.7% gain. This strength has primarily been driven by strong growth expectations and elevated inflation in the US economy, factors that have largely come to the forefront over the past few months. The market's focus has shifted to the anticipated policies of Republican presidential candidate Donald Trump, who is expected to implement tighter immigration controls, raise import tariffs, and cut taxes. These expected changes have bolstered the Greenback’s outlook for 2025.
One of the key factors driving the USD's performance has been the Federal Reserve's (Fed) stance on interest rates. The Fed has signaled that fewer rate cuts are likely in the coming year, further supporting the Greenback. Fed Chairman Jerome Powell, however, has downplayed any immediate impact from Trump's policies, stating on December 18 that it is "very premature" to draw conclusions about how those policies will influence inflation or interest rates. Powell emphasized the uncertainty surrounding the specifics of trade policies, such as which countries would be affected by tariffs and for how long.
On the other hand, the Canadian Dollar (CAD) remains under pressure, with the Bank of Canada (BoC) expected to continue cutting interest rates to mitigate the risks of inflation undershooting its 2% target. The BoC already reduced its key borrowing rate by 175 basis points (bps) in 2024, bringing it to 3.75%. These rate cuts are seen as a response to economic challenges, including potential deflationary pressures.
As the USD/CAD pair trades near 1.4400, the outlook for both currencies is shaped by the monetary policies of their respective central banks. The Fed’s less aggressive approach to rate cuts has provided support to the US Dollar, while the BoC’s ongoing dovish stance on interest rates has weighed on the Canadian Dollar. Investors will be watching for any further clues about the future direction of US and Canadian monetary policy as they position themselves for the new year.
Looking ahead, the USD's performance in the coming months will largely depend on the pace of economic growth in the United States and the Fed’s response to inflation trends. The strength of the US economy, coupled with expectations of a tightening labor market and higher inflation, could keep the Greenback strong throughout 2025.
Meanwhile, the CAD’s trajectory will depend on how effectively the BoC can manage inflation risks and support economic stability. With the central bank likely to maintain a cautious approach, the CAD could continue to face challenges in the near term. As global markets digest the uncertainties of the year ahead, traders will closely monitor any changes in the outlook for both currencies.
The USD/CAD currency pair remains a focal point for traders, with 1.4400 acting as a critical support level to watch in the coming sessions. The lack of liquidity due to year-end trading conditions could lead to increased volatility, making it essential for investors to stay attuned to developments in both the US and Canadian economies.
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