• USD/CAD trades with caution around 1.4300 as Trump threatens 25% tariff hikes on Canada.
• Canada PM Trudeau reiterated that the government is prepared to respond to Trump’s tariffs if announced.
• Investors expect the BoC to cut interest rates by 25 bps later this month.

The USD/CAD pair trades cautiously near 1.4300 in Wednesday’s European session. The Loonie pair remains under pressure as United States (US) President Donald Trump has suggested 25% tariffs on Mexico and China, which will come into effect on February 1. Trump’s tariff announcement has dampened Canada’s economic outlook.

In response to that Canadian Prime Minister Justin Trudeau said on Tuesday that his government is ready to “respond to all scenarios” if Trump imposes tariffs on Canada, Reuters report.

The overall appeal of the Canadian Dollar (CAD) remains weak against the US Dollar (USD) amid hopes of further increase in policy divergence. Investors expect the Bank of Canada (BoC) to cut interest rates further by 25 basis points (bps) to 3% in next week’s policy meeting. BoC dovish bets have accelerated after the release of the Consumer Price Index (CPI) data for December, which showed that the annual headline inflation decelerated to 1.8%.

On the contrary, the Federal Reserve (Fed) is expected to keep interest rates in the next three policy meetings, according to the CME FedWatch tool.

USD/CAD trades in a tight range of 1.4260-1.4465 for over a month. The outlook of the Loonie pair remains firm as the 50-day Exponential Moving Average (EMA) slopes higher, which trades around 1.4235.

The 14-day Relative Strength Index (RSI) falls into the 40.00-60.00 range, suggesting a sideways trend.

The rally in the Loonie pair could advance to near the round-level resistance of 1.4600 and Mar 2020 high of 1.4668 if the asset breaks above Tuesday’s high of 1.4518.

On the contrary, a downside move below the December 11 low of 1.4120 could drag the asset towards the December 4 high of around 1.4080, followed by the psychological support of 1.4000.
 

USD/CAD daily chart

(Click on image to enlarge)

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