USD/CAD Outlook: Dollar Tests 1.3650 as Monetary Divergence and Trade Risks Collide

In recent weeks, the Canadian dollar has been supported by monetary policy factors. In December, the Bank of Canada paused its rate-cutting cycle, keeping the benchmark interest rate at 2.25% and confirming policymakers’ concerns about a possible reacceleration of inflation, which reached 2.2% in October—above the target level. Additional support has come from the resilience of the Canadian economy, including a stable labor market and relatively solid consumer activity, reducing the need for further near-term monetary easing.

By contrast, the U.S. Federal Reserve has maintained a more dovish stance, cutting its key rate to 3.75% at the December meeting. Market expectations point to a potential acceleration of rate adjustments this year, largely tied to an upcoming leadership change at the Fed, with a new chair expected to be appointed as early as May. This shift could bring a more stimulative policy bias. Against this backdrop, a persistent interest-rate differential in Canada’s favor has emerged, weighing on the relative appeal of the U.S. dollar for yield-focused investors and supporting capital inflows into Canadian assets, particularly bonds. Analysts generally expect this monetary divergence to remain in place over the medium term. Some experts even suggest that if economic activity continues to recover and inflation stays near target, the Bank of Canada could eventually consider raising rates toward the end of 2026—an outcome that would further strengthen the Canadian dollar.

Still, this constructive monetary backdrop is colliding with significant trade-related risks. Chief among them is the scheduled review of the USMCA trade agreement in July. Signals from the Republican administration in the White House about imposing tariffs of up to 100% on Canadian goods—should Canada deepen its economic ties with China—have injected a high degree of uncertainty. While the current effective average tariff on Canadian exports to the U.S. stands at around 5.9%, the risk of a sharp tightening in trade policy is already dampening investment sentiment and putting pressure on the loonie.

Toward the end of the week, investors’ focus will shift to January labor market reports. Analysts expect employment growth in Canada to slow, with total employment rising by just 7.3 thousand after 8.2 thousand previously, while the unemployment rate is forecast to remain unchanged at 7.3%. In the U.S., job growth in the nonfarm sector is projected to accelerate from 50.0 thousand to 70.0 thousand, while average hourly earnings growth may ease year-on-year from 3.8% to 3.6%, potentially signaling a moderation in inflationary pressures.

Support and resistance levels

On the daily chart, Bollinger Bands are pointing decisively lower. The price range is narrowing, but it still leaves enough room for the current level of market activity. The MACD has turned upward, generating a fresh buy signal as the histogram moves above the signal line. The Stochastic oscillator shows a similar pattern, rebounding from oversold territory and suggesting that the U.S. dollar had been overstretched in the very short term.

Resistance levels: 1.3671, 1.3700, 1.3750, 1.3800.

Support levels: 1.3642, 1.3600, 1.3535, 1.3481.

Trading scenarios and USD/CAD outlook

Long positions may be considered after a confident break above 1.3671, with an upside target at 1.3800. Stop-loss: 1.3600. Time horizon: 2–3 days.

A rebound from the 1.3671 resistance area followed by a break below 1.3600 could signal an opportunity to open short positions, targeting 1.3481. Stop-loss: 1.3671.