USD/CAD extends its decline for a second consecutive session, trading near the 1.3660 area during Asian hours on Monday. The pair remains under pressure close to the five-month low of 1.3642, last seen on December 26, as the commodity-linked Canadian Dollar (CAD) draws support from firmer Oil prices. As Canada is the largest crude Oil exporter to the United States, higher energy prices typically bolster the CAD.
Oil prices support the Canadian Dollar
West Texas Intermediate (WTI) Oil prices are rebounding after suffering losses of around 2.5% in the previous session, with crude trading near $57.20 at the time of writing. The recovery in Oil prices comes amid sustained geopolitical tensions in the Middle East, where Saudi airstrikes in Yemen and Iran’s declaration of a “full-scale war” against the United States, Europe, and Israel have intensified concerns over potential supply disruptions.
US Dollar pressured by Fed rate cut expectations
On the other side of the pair, the US Dollar remains subdued as markets continue to price in the possibility of two additional rate cuts by the Federal Reserve (Fed) in 2026. Investors are now looking ahead to the Federal Open Market Committee December Meeting Minutes, due on Tuesday, which could offer further insight into internal policy discussions and the Fed’s outlook for the coming year.
At its December meeting, the Fed reduced interest rates by 25 basis points, bringing the target range to 3.50%–3.75%. This move capped a total of 75 bps in rate cuts delivered in 2025, against the backdrop of a cooling labor market and still-elevated inflation.
According to the CME FedWatch tool, markets are assigning an 81.7% probability that rates will remain unchanged at the Fed’s January meeting, up from 77.9% a week earlier. Meanwhile, expectations for a 25-basis-point cut have eased, with the implied probability falling to 18.3% from 22.1% a week ago.
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