The resilient US economy, cautious Fed messaging, and ongoing inflationary concerns, the dollar is likely to maintain its bullish outlook. While the CAD has benefited from short-term political developments, the medium-term outlook remains bearish due to the uncertainty of trade policy from Trump.

USD: Still the king

The US dollar remains well-supported due to robust economic fundamentals, cautious Federal Reserve commentary on rate cuts, and a strong December Non-Farm Payrolls (NFP) report, which reduced market expectations for 2025 rate easing. The Fed’s December meeting minutes highlighted its readiness to slow the pace of rate cuts, reflecting solid economic momentum and persistent inflation risks. Market expectations now suggest only one rate cut in 2025, with timelines being pushed further into October 2025 following the strong NFP data. Payrolls rose by 256,000 in December, well above expectations, while the unemployment rate fell to 4.1%. These results indicate resilience in the labor market, reducing the urgency for immediate monetary policy easing.

Meanwhile, Fed officials continue to emphasize caution in future rate adjustments. Hawkish members, such as Governor Bowman and President Schmid, underscored inflation concerns and the need for gradual rate cuts, if any, to avoid undermining price stability. Their comments reflect a central bank still focused on inflation as a primary mandate. Meanwhile, dovish voices, including President Goolsbee, noted progress in cooling inflation over recent months but acknowledged its stickiness due to base effects. Together, these factors suggest the Fed is unlikely to rush into aggressive rate cuts, further supporting the USD.

Looking ahead, market attention will focus on the US December CPI data. Persistent inflation would reinforce recent central bank commentary that the Fed should remain cautious and adopt a gradual approach to rate cuts. However, even in the event of cooling inflation, a single data point may not significantly shift market sentiment or alter the current pricing dynamics. Additionally, the near term focus will remain to the incoming Trump administration, where any downward corrections in the USD could present attractive buying opportunities. In summary, supported by a resilient US economy, cautious Fed messaging, and ongoing inflationary concerns, the dollar is likely to maintain its bullish outlook. While gradual monetary easing may occur later in 2025, the immediate trajectory for the USD remains favorable, bolstered by strong economic fundamentals, policy divergence with other major central banks, and the market’s anticipation of potential policy shifts under the new Trump presidency.

CAD: Political no helping at all

The CAD remain under pressures despite the recent political developments providing temporary support. The anticipated resignation of Prime Minister Justin Trudeau has sparked short-term optimism, but this does little to address the broader challenges weighing on the currency. The primary focus remains on trade risks tied to the incoming Trump administration, where the threat of imposing 25% tariffs on Canadian goods could severely pressure the CAD if realized.

Moreover, strong December labor market data which released last Friday, showing a 90.9K employment gain and unemployment falling to 6.7%, has modestly tempered expectations of a BoC rate cut, with the probability for January’s cut dropping to 53% from 71% prior to the data. However, the labor market’s strength is unlikely to overshadow the persistent trade risks or shift the BoC’s dovish stance significantly. In fact, institutions like JPMorgan and ING continue to highlight the CAD’s vulnerability. ING warns of a potential USD/CAD climb to 1.50 should trade tensions escalate, while JPM recommends buying USD/CAD on any pullbacks, expecting sustained pressure on the Canadian dollar. Additional risks include weaker energy prices tied to Trump's energy policies and the uncertainty surrounding Canada's future trade relationship with the U.S.

Looking ahead, the Canadian economic calendar is relatively light, with no major market-moving events on the immediate horizon. CAD movements will likely align with global risk sentiment, particularly in response to any comments or actions related to tariff threats from the Trump administration, which could further reinforce the bearish outlook in the near term. In summary, while the CAD has benefited from short-term political developments, the medium-term outlook remains bearish. Persistent trade uncertainty, a dovish BoC, and potential energy price weakness will likely keep the CAD under pressure, with significant downside risks looming as the Trump administration sets its policies in motion.

USD/CAD 4H Chart

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