USD/CAD Edges Lower Below 1.3750 as Traders Weigh Fed’s 2026 Outlook
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The USD/CAD currency pair is showing vulnerability near its almost three-month low of 1.3750 during the late Asian trading session on Monday. The pair has struggled to regain ground, pressured by a weak US Dollar (USD) as traders assess the Federal Reserve’s interest rate outlook for 2026. This article from LFtrade presents a thorough breakdown of the subject, guided by their experienced brokers.
Investors are cautious as the Loonie remains resilient against major currencies, reflecting expectations that the Bank of Canada (BoC) may pause its monetary easing in the near term. Meanwhile, the US Dollar Index (DXY), which measures the Greenback against six major currencies, is trading close to its eight-week low of 98.13, recorded last Thursday. This underscores the weak performance of the USD and reinforces the downside bias in the USD/CAD pair.
Fed Outlook for 2026 Influences USD/CAD
Market participants are closely monitoring the Federal Reserve (Fed) as expectations for interest rate cuts continue to influence the FX market. According to the CME FedWatch tool, there is a 64.3% probability that the Fed will reduce rates at least twice by the end of 2026.
The Fed’s dot plot indicates that policymakers anticipate the Federal Funds Rate falling to 3.4% by 2026, implying at least one more cut from current levels of 3.50%-3.75%. This dovish outlook stems from persistent US labour market weakness, ongoing economic uncertainty, and public pressure from political figures, including the US President, who has repeatedly called for additional rate reductions.
Last week, White House spokeswoman Karoline Leavitt noted that the US President welcomed the recent 25-basis-point (bps) cut, but emphasized that more action is needed to stimulate growth. Such commentary adds to the market’s dovish sentiment and has contributed to the pressure on the USD/CAD pair, pushing it toward its three-month low.
US Nonfarm Payrolls Data in Focus
The upcoming US Nonfarm Payrolls (NFP) report for November is a key event for traders. Scheduled for release on Tuesday, the NFP data will provide fresh insight into the US labour market, potentially influencing the Fed’s monetary policy trajectory.
Any signs of slowing job growth or weak wage inflation could strengthen the case for further interest rate cuts, weighing on the US Dollar and supporting the Canadian Dollar. Conversely, stronger-than-expected NFP numbers could stabilize the USD, limiting the downside pressure on USD/CAD.
Canadian Dollar Remains Supported
The Canadian Dollar (CAD) has shown firm performance against its peers in recent sessions. Investors anticipate that the BoC has likely completed its rate-hiking cycle, with little room for further monetary policy adjustments in the near term.
In the recent policy statement, the BoC confirmed that the current rate is “at about the right level” to maintain inflation near 2%, assuming that the economy and inflation evolve as projected. This supportive stance has helped the Loonie resist further losses, even as the USD underperforms.
Canadian CPI Data Could Impact USD/CAD
Attention is now shifting to Canada’s Consumer Price Index (CPI) for November, scheduled for release at 13:30 GMT. The headline CPI is forecast to increase to 2.4% year-on-year, up from 2.2% in October.
Stronger-than-expected CPI data could bolster the CAD, reinforcing expectations that the BoC will maintain current rates. This scenario could create additional downside pressure on USD/CAD, potentially pushing the pair further below 1.3750. On the other hand, a weaker CPI print could reduce CAD strength, offering the USD some relief.
Technical Outlook: USD/CAD Below 1.3750
From a technical perspective, the USD/CAD pair is vulnerable near 1.3750, a level that has acted as support over the past three months. A break below this threshold could open the door for a decline toward 1.3700, with traders eyeing long-term trend lines for potential support zones.
Resistance is seen near 1.3800, where previous retracement highs coincide with key psychological levels. The combination of weak USD, dovish Fed expectations, and strong CAD fundamentals increases the likelihood of further downside.
Key Takeaways for Traders
USD/CAD is trading near its three-month low of 1.3750, struggling to regain momentum. A dovish Fed outlook has markets pricing in multiple interest rate cuts by 2026, influenced by the US President’s calls and US labour market weakness. Key upcoming catalysts include US NFP and Canadian CPI, which could shape near-term FX dynamics.
Meanwhile, CAD strength persists due to the BoC’s policy stance, providing support against USD weakness. From a technical perspective, support is at 1.3750, with further downside toward 1.3700 likely if broken, and resistance near 1.3800.
Traders will continue to monitor macroeconomic releases and central bank guidance, as the USD/CAD pair remains sensitive to both monetary policy expectations and key economic data in the coming week.