The USD/CAD pair has ended its three-day winning streak, trading near 1.4400 during the European trading hours on Monday. This decline comes as the US Dollar (USD) struggles to maintain momentum amid low trading volumes ahead of the New Year holiday.
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Factors Influencing USD/CAD Movement
US Federal Reserve’s Hawkish Stance
The markets continue to digest the US Federal Reserve’s (Fed) hawkish outlook, which could lend support to the US Dollar and the USD/CAD pair. At its December meeting, the Fed reduced its benchmark interest rate by 25 basis points. However, the latest Dot Plot projections indicate only two rate cuts in 2025, signaling a cautious approach.
Fed Chair Jerome Powell emphasized earlier this month that officials “are going to be cautious about further cuts” following the anticipated quarter-point rate reduction. This hawkish tone is expected to provide a tailwind for the USD in the near term.
Anticipated Economic Policies Under the New Administration
Traders are also factoring in potential economic policies under the incoming administration of President-elect Donald Trump. These policies, which could include tax cuts, tariffs, and deregulation, are expected to drive inflation. In turn, this may prompt the Fed to revise its economic outlook for the coming year.
Canadian Dollar Supported by Crude Oil Prices
Crude Oil Prices Continue to Rise
The Canadian Dollar (CAD), being a commodity-linked currency, gains support from higher crude oil prices. Canada remains the largest oil exporter to the United States, and the price of West Texas Intermediate (WTI) crude oil has risen for the second consecutive day, trading around $70.20 per barrel at the time of writing.
Challenges in Crude Oil Market
Despite the recent gains, crude oil prices face potential headwinds. Market focus is shifting to the 2025 demand outlook, with projections of an oversupplied market potentially hindering the Organization of the Petroleum Exporting Countries and its allies’ (OPEC+) efforts to resume idled production. Additionally, uncertainties surrounding future demand from China, the world’s largest oil importer, could further limit crude oil’s upward momentum.
Canadian Dollar Declines as Benchmark Yield Rises
Outlook for USD/CAD Pair
In the short term, the USD/CAD pair’s movement will likely be influenced by the interplay between the Fed’s cautious stance and crude oil price dynamics. While the US Dollar may find support from the Fed’s hawkish tone, rising oil prices could bolster the Canadian Dollar, keeping the pair’s movements balanced. However, uncertainties around global demand and economic policies will remain critical factors to watch.
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