has been moving lower since early November after failing to hold above 1.40. The pair has fallen more than 2.5% as investors adjusted their expectations around interest rates in both the United States and Canada. As of now, USD/CAD is trading near 1.37685, showing that sellers remain in control. Canada's steady inflation and a more balanced interest rate outlook between the two countries are supporting the Canadian dollar. Without any major new economic surprises, the pair is likely to remain under pressure but will mostly trade sideways in the near term.
Technical outlook for USD/CAD
Since peaking at 1.41392 on November 5, USD/CAD has entered a clear corrective phase, losing more than 2.5% as markets reassessed the political outlook amid divergent signals from the Bank of Canada and the Federal Reserve. The initial warning came with the appearance of a shooting star candle, followed by a classic failed swing reversal in which the bounce stalled below the previous high near 1.41300 and subsequently broke below the low of 1.39705, confirming a downside extension. The bearish case has been reinforced by the formation of a death cross, with the 20-period EMA crossing below the 50-period EMA, underscoring a deterioration in the short-term trend structure. At the time of writing, the pair is trading near 1.37685 and remains below the 20 and 50 period EMAs, highlighting sustained bearish pressure. Momentum studies align with this view, as the momentum oscillator has fallen below the 100 baseline and the RSI continues to hold below the 30 level, indicating persistent selling pressure. On the upside, any corrective bounce is likely to face resistance initially at 1.37990, followed by 1.38700 and 1.39731, while on the downside, a continuation downside would expose support at 1.37468, then 1.36792 and potentially the 1.34544 zone.
Rate Gap Narrows, Giving Canadian Dollar Advantage
Political perspectives in Canada and the United States are gradually converging, reducing the United Kingdom's traditional advantage. The Bank of Canada has kept its policy rate unchanged at 2.25% and signaled a pause in its easing cycle, with markets now seeing less chance of further tightening through 2026. At the same time, expectations for the U.S. Federal Reserve have shifted toward a prolonged hold, with investors largely not pricing in any rate changes at the next meeting. As a result, the gap between US and Canadian interest rates is narrowing, reducing yield-based support for the US dollar and tending to offer relative support to the Canadian dollar in the near term, particularly during periods of stable risk sentiment.
Canada inflation cools, easing pressure on Bank of Canada
Canada's remained stable at 2.2% in November, showing that price pressures are still largely under control. While food prices rose at their fastest pace in more than two years, this was offset by lower gasoline and housing costs, which helped keep overall inflation unchanged. Encouragingly, the measures, which exclude volatile items such as food and fuel, fell below 3% for the first time since March, staying within the Bank of Canada's target range. Lower gas prices over the past year, helped by the elimination of a carbon tax, have been a key factor in keeping inflation subdued, even as tariffs and climate-related issues drive up grocery and restaurant prices. Financial markets reacted calmly to the data, with the Canadian dollar rising slightly and bond yields falling, reinforcing the view that inflation is cooling rather than picking up again.
Outlook: USD/CAD in wait-and-see mode
Looking ahead, the outlook for USD/CAD remains fairly balanced. The US dollar could regain strength if upcoming US economic data surprises to the upside and widens yield spreads in its favor, while a Federal Reserve would likely have the opposite effect by reducing the dollar's appeal. Instead, the Canadian dollar would benefit from stable or improving commodity prices, particularly oil, and expectations that US interest rates will fall or remain low for longer. Overall, from mid to late December 2025, the bias tilts between neutral and slightly favorable to the Canadian dollar, and the USD/CAD pair is likely to trade in a range unless a clear and unexpected change in economic data or central bank guidance changes the broader market narrative.
