USD/CAD drops under 1.3900 as concerns over Fed autonomy weigh on the US Dollar

USD/CAD Retreats After Prolonged Rally

The USD/CAD currency pair began the week under selling pressure, ending a nine-day streak of gains that had pushed it to its highest point since early December, near 1.3920 on Friday. The decline during the session was largely attributed to a broad weakening of the US Dollar (USD), which caused the pair to dip below its 200-day Simple Moving Average (SMA) in recent trading.

Fed Independence and Market Sentiment

Comments from Federal Reserve Chair Jerome Powell highlighted that the central bank’s decisions on interest rates are guided by what best serves the public interest, not by presidential preferences. This stance has reignited worries about the Fed’s autonomy and its ability to remain insulated from political influence, contributing to the USD’s retreat from its recent highs and weighing on the USD/CAD exchange rate.

Geopolitical Tensions and Economic Outlook

On the geopolitical front, US President Donald Trump announced on Sunday that a variety of responses, including possible military measures, were being considered in reaction to the ongoing unrest in Iran. Combined with the ongoing conflict between Russia and Ukraine, these developments continue to elevate global risk levels. These factors, together with diminished expectations for aggressive rate cuts by the Fed, may offer some support to the US Dollar. Additionally, a drop in crude oil prices during the session could negatively impact the oil-sensitive Canadian Dollar (Loonie), potentially lending further support to the USD/CAD pair.

Canadian Dollar Under Pressure

The Canadian Dollar faces additional headwinds from signs of a softening domestic labor market, which dampens expectations for tighter monetary policy from the Bank of Canada (BoC). In contrast, Friday’s US Nonfarm Payrolls (NFP) report revealed a decline in the unemployment rate to 4.4% for December, easing concerns about the US labor market and strengthening the case for the Fed to maintain higher interest rates for an extended period. This dynamic may help prevent a more significant decline in the USD and suggests caution for those betting on further USD/CAD losses.

Upcoming US Inflation Data

With key US inflation indicators—the Consumer Price Index (CPI) and Producer Price Index (PPI)—scheduled for release on Tuesday and Wednesday, many traders may choose to hold off on major moves. As a result, it may be wise to wait for clear evidence of sustained selling before concluding that the USD/CAD pair has reached a short-term peak and preparing for a notable correction.