The USD/CAD pair remains elevated, nearing resistance at 1.4445, as the Canadian dollar struggles under the weight of political uncertainty and diverging central bank policies. Despite a brief recovery earlier in the week, the pair has gained 0.5% in favor of the U.S. dollar, keeping it at levels not seen in four years.

Trudeau’s Resignation Fuels Uncertainty

Canadian Prime Minister Justin Trudeau announced on January 6 that he would step down once the Liberal Party selects a new leader. While Trudeau will remain in office during the transition, his resignation has injected uncertainty into the Canadian political landscape, particularly as Canada faces tariff threats from the new U.S. administration.

With no clear successor ready to tackle Canada’s economic and political challenges, market participants are turning to the U.S. dollar as a more stable investment, increasing bullish pressure on USD/CAD.

Central Bank Divergence Drives USD Strength

The Bank of Canada (BoC) and Federal Reserve remain on divergent monetary policy paths, further favoring the U.S. dollar. The BoC is expected to take a dovish stance in its upcoming January 25 decision, potentially cutting rates by 50 basis points to 2.75%. This outlook reflects modest economic growth and cooling inflation in Canada.

In contrast, the Fed has reiterated its commitment to slowing the pace of rate cuts, with inflation still above its 2% target. According to CME Group data, there is a 95% probability that the Fed will keep its benchmark rate at 4.25%-4.5% during its January 29 meeting. This stark interest rate differential continues to attract investment toward the U.S. dollar.

Technical Outlook for USD/CAD

USD/CAD has sustained its upward trend since late September 2024, reaching a high of 1.4467. Key technical indicators suggest further gains, though bearish signals warrant caution:

• Resistance at 1.4445: The pair is testing this critical level, with a breakout likely to confirm the strength of the long-term uptrend.
• Support at 1.4325: This level aligns with recent session lows and the upward trendline, offering a potential floor for bearish corrections.
• Key Support at 1.4208: A breach below this level could jeopardize the uptrend, signaling renewed strength for the Canadian dollar.

RSI Signals Bearish Divergence

A bearish divergence in the RSI indicator suggests potential for short-term corrections. The RSI has shown lower highs despite equal highs in price, reflecting imbalances in recent buying momentum. As the RSI approaches the 50 level, it indicates indecision, particularly near the key resistance zone.

Outlook for USD/CAD

USD/CAD remains well-supported by political and economic factors favoring the U.S. dollar. However, short-term corrections are possible, especially if technical resistance at 1.4445 holds. The pair’s trajectory will likely hinge on upcoming central bank decisions and the resolution of Canada’s political uncertainty.

Traders should watch for a break above 1.4445 to confirm the continuation of the uptrend or a pullback to support levels for potential buying opportunities. With significant volatility expected, careful monitoring of macroeconomic and technical signals is essential.