• The USD/CAD forecast remains defensive as the dollar loses momentum amid improved sentiment.
• Dismal US PMI and accommodative Fed keep the greenback softer.
• Declining energy prices cap the gains in CAD, especially after the situation in Venezuela.

During Tuesday’s London session, the USD/CAD price is on the defensive, continuing a slight decline from the 1.3815 area, its highest point since mid-December. Price action has remained capped below recent highs, with spot holding around the mid-1.3700s as markets consider a combination of lingering support factors for the Canadian dollar and softening sentiment toward the US dollar, despite the pair’s inability to trigger downward momentum.

Growing expectations that the Federal Reserve may cut interest rates further later this year have caused the US dollar to weaken, as it failed to maintain gains near a four-week high. That opinion was supported by mixed US PMI data for December, with the ISM Manufacturing PMI further declining into contraction territory at 47.9.

The overall picture indicates continued softness in US industrial activity, despite some stability in the employment and price components. This has reduced demand for conventional safe havens and put pressure on the dollar at a time when risk sentiment is still generally positive.

Another factor has been political unpredictability. Investors keep reducing long positions ahead of important US data later in the week due to ongoing concerns about central bank independence under President Donald Trump’s administration. Consequently, USD/CAD has been dragged lower as the Dollar Index (DXY) has moved closer to the 98.00 handle.
The Bank of Canada’s comparatively firm policy stance has provided some support for the Loonie. In contrast to the Fed’s increasingly cautious tone, recent statements from policymakers suggest that officials remain aware of the risks of inflation. Although oil-related dynamics remain less favorable for Canada, this divergence has helped limit the upside for the USD/CAD.

Despite rising from a two-week low on Monday, crude prices have not been able to gain momentum. Longer-term price outlooks have been influenced by expectations that US control over Venezuela’s oil industry could eventually lead to increased global supply. This poses a challenge for the Canadian dollar, which is closely tied to commodities, particularly since markets anticipate a weaker global oil balance through 2026. One of Canada’s primary sources of external assistance would be jeopardized by any prolonged decline in energy prices.

Currently, traders appear hesitant to place large directional bets ahead of a busy data calendar. The US Nonfarm Payrolls report on Friday and Canada’s employment statistics will probably determine the short-term trend in the USD/CAD.
 

USD/CAD Technical Forecast: Consolidation Above 100-MA
 

(Click on image to enlarge)

USD/CAD 4-hour chart
 

The USD/CAD price retreated from Monday’s peak but remains supported by the 100-period MA near 1.3745, while a bullish crossover of 20- and 50-period MA continues to support the upside. The RSI value has declined from the overbought region and is flat near 60.0, suggesting consolidation at current levels.

The price could aim to test the 20-period MA near 1.3870, provided it finds acceptance above the 1.3800 level. On the flip side, any move below the 100-MA support could find selling traction and look to deepen the correction to the 50-period MA near 1.3700 ahead of December swing lows at 1.3650.

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