The USD/CAD pair saw an upward trajectory for the third consecutive day, trading around 1.4420 during the European hours on Wednesday. This increase is largely attributed to the US Dollar (USD) drawing strength from the Federal Reserve's cautious approach to its forthcoming policy decision. With the Federal Reserve widely anticipated to maintain its current rates in its decision on Wednesday, the Canadian Dollar (CAD) is facing mounting pressure due to differing monetary policy expectations between the two nations.
Traders are expecting a rate cut from the Bank of Canada (BoC), which stands in stark contrast to the anticipated static stance of the US Federal Reserve. This expectation has contributed significantly to the USD/CAD pair's rise. Additionally, the USD/CAD gains support from heightened risk aversion following tariff threats by US President Donald Trump, which have further pressured the Canadian Dollar. The potential tariffs have instigated fears of substantial trade disruptions with the United States, Canada’s largest trading partner.
In light of these developments, traders have shown a renewed demand for the US Dollar while adopting a cautious approach ahead of key Fed policy announcements. The prospect of a widening interest rate differential between the US and Canada has bolstered the USD/CAD pair's position. As the pair continues to extend gains with the anticipation of the Fed maintaining its current rates, the Canadian Dollar has also faced additional decline pressure from falling crude oil prices—a crucial factor as Canada is the largest crude exporter to the United States.
The weekend threat from President Trump to impose a 25% tariff on Canadian goods starting February 1 has exacerbated the CAD's weakening position. Concerns over US trade policy have intensified, adding further downward pressure on the Canadian currency. The potential for a widening interest rate differential between the US and Canada serves as another crucial element influencing the USD/CAD's upward movement.
The Bank of Canada's expected interest rate cut contrasts with the US Federal Reserve's anticipated decision to keep rates unchanged, highlighting diverging monetary policies between the two countries. This divergence has been a pivotal factor in driving up the USD/CAD pair, as traders factor in these varied economic outlooks.