USD/CAD Outlook: Fed Uncertainty Supports CAD Strength

Over the last five trading sessions, USD/CAD has shown a clear and consistent bearish tone, with the pair declining by nearly 1% as markets move toward the final trading days of 2025. Downside pressure has remained steady, largely driven by ongoing uncertainty surrounding U.S. interest rate policy. This lack of clarity has allowed underlying weakness in the U.S. dollar to persist, creating a supportive environment for continued Canadian dollar strength. As long as this perception of U.S. dollar vulnerability remains intact, USD/CAD is likely to retain a dominant bearish bias in the near term.

Federal Reserve policy expectations continue to reflect a high degree of indecision as the market looks ahead to early 2026. For the January 28 meeting, pricing suggests more than an 80% probability that interest rates will remain unchanged. However, expectations for the March 18, 2026 decision are far less settled. Markets currently assign a 47% probability that rates remain at 3.75%, while close to 44% is already pricing in a 25 basis point rate cut to around 3.50%. This split highlights the absence of a clear policy direction and reinforces broader uncertainty surrounding the Federal Reserve’s outlook for 2026.

This uncertainty has increasingly weighed on the U.S. dollar, as the prospect of lower rates reduces the appeal of dollar-denominated assets and limits the formation of strong short-term demand. The impact is evident in the DXY index, which has slipped below the 98 level after moving away from the 100 area. These levels have not been seen since October 2025, confirming a notable weakening in the dollar toward year end.

In contrast, Canada enters 2026 with a more stable monetary policy outlook. The Bank of Canada is widely expected to keep rates unchanged at 2.25% at its January 28 meeting, with no major policy shifts anticipated. Inflation trends have not softened enough to justify near-term rate cuts, supporting a neutral stance from policymakers.

The contrast between a hesitant Federal Reserve and a steadier Bank of Canada continues to favor Canadian dollar strength into the close of 2025. As long as this divergence in expectations persists, selling pressure is likely to remain the dominant force shaping short-term USD/CAD price action.

USD/CAD Technical Outlook

USD/CAD continues to trade within a well established bearish structure. Since late November 2025, price action has respected a descending trendline, steadily guiding the pair toward its annual lows. No significant bullish corrections have developed so far to challenge this trend, keeping the downside structure as the dominant technical reference. However, as year end approaches, early signs of neutrality are beginning to appear on the chart. If this shift persists, it may allow for short term corrective rebounds.

RSI:The RSI remains below the 50 level, indicating that momentum over the past 14 sessions continues to favor sellers. At the same time, the indicator is hovering near the oversold zone around 30, suggesting momentum may be stretched and raising the potential for short term corrective moves.

MACD:The MACD histogram is fluctuating near the zero line, pointing to neutral momentum in short term moving averages. Continued lack of directional strength could support brief technical rebounds.

Key Levels

1.37220 – Key resistance:This level represents the nearest upside resistance and would be the primary reference during any corrective recovery. A sustained break above this zone would challenge the prevailing bearish trendline and could shift the bias toward a more constructive outlook into the end of 2025.

1.36570 – Near term barrier:A former support level that aligns with a neutrality zone from July 2025. Price action around this area may encourage consolidation or range bound behavior in the short term.

1.35661 – Major support:This level marks the 2025 lows and remains the most critical downside reference. A decisive break below this zone would expose the pair to fresh yearly lows and reinforce the broader bearish trend.