USD/CAD Climbs as Liquidity Thins and Key Support Levels Hold

Key Moments

Fundamental Drivers for USD/CAD

USD/CAD is near 1.3700, up 0.18% in Monday’s European session. The Canadian Dollar faces modest selling pressure amid thin trading conditions in a holiday-shortened week. These conditions appear to amplify price action in the Loonie pair.

Despite the minor weakness, the Canadian Dollar has outperformed other major currencies recently. Expectations that the Bank of Canada (BoC) will refrain from cutting rates in early 2026 have supported the Loonie. The central bank is seen maintaining a restrictive stance because Canadian inflation has remained slightly above its 2% target over the past three months.

Last week’s BoC meeting minutes highlighted this cautious approach. Officials agreed the “current stance is appropriate” and noted it is “difficult to predict the timing or direction of the next rate move.” They also reaffirmed that they stand ready “to respond if the outlook changes materially.”

European Update: 1.3665 met in $USDCAD. Monitoring bounces into 1.3725/35 for a possible cap into yearend. 1.3580 down to 1.3540 could come closer if such were to be the case. pic.twitter.com/G1siowhw63

— Forex Analytix (@forexanalytix) December 29, 2025

Fed Outlook and Dollar Dynamics

The US Dollar is trading cautiously as investors await the release of the Federal Open Market Committee (FOMC) minutes from December, scheduled for Tuesday. In that meeting, the Fed cut rates by 25 basis points to a 3.50%-3.75% target range.

At the time of writing, the US Dollar Index (DXY), measuring the Greenback against six major currencies, is nearly unchanged around 98.00. The index remains close to last week’s 12-week low of 97.75.

USD/CAD Technical Overview

On the daily chart, USD/CAD is quoted at 1.3692. The pair trades below the 20-day EMA at 1.3786. This downward slope limits rebound attempts and maintains a bearish technical tone.

The 14-day RSI stands at 30.69, hovering near oversold territory but edging higher from recent lows. This suggests that selling pressure is easing slightly.

Using the 1.3540 low to 1.4139 high as a reference, the 78.6% Fibonacci retracement at 1.3668 acts as nearby support during the current pullback.

If USD/CAD rebounds from 1.3668, the pair could test the 61.8% Fibonacci retracement at 1.3769. The 20-day EMA at 1.3786 may provide additional resistance. Conversely, a break below 1.3668 would keep sellers in control, especially if the RSI stays below 50. A daily close above the 20-day EMA would signal improved technical conditions.

(The technical analysis of this story was written with the help of an AI tool.)

Bank of Canada: Role and Policy Tools

The Bank of Canada, based in Ottawa, sets interest rates and manages monetary policy through eight scheduled meetings per year, with additional emergency sessions if needed. Its main goal is price stability, keeping inflation within a 1-3% band. The primary tool is the policy interest rate. Higher rates typically strengthen the Canadian Dollar, while lower rates weigh on it. The BoC also has other instruments, such as quantitative easing (QE) and quantitative tightening (QT).

Quantitative Easing and Tightening Explained

In exceptional cases, the BoC can use QE, creating Canadian Dollars to purchase assets, typically government or corporate bonds, from financial institutions. QE generally pressures the Canadian Dollar downward and serves as a last resort when conventional rate cuts cannot achieve price stability. The BoC implemented QE during the 2009-11 financial crisis when credit markets froze.

QT is the opposite of QE and is used once economic conditions improve and inflation rises. Under QT, the BoC halts new asset purchases and stops reinvesting maturing bond payments. This approach generally supports the Canadian Dollar.