• The US Dollar remains firm against a softer CAD and tests long-term highs at 1.4240
• A dovish BoC and concerns about higher tariffs on Canadian products are weighing on the CAD,
• Technically, the is likely to meet significant resistance at the 1.4250-60 area.

The US Dollar keeps trading firm against its weaker Canadian Counterpart. The mild CAD recovery attempt seen on Friday was contained above the 1.4200 level, and the pair is crawling higher again on Monday, to test four-year highs at 1.4240.

The monetary policy divergence between the Federal Reserve and the Bank of Canada is the main support for the pair. Beyond that, US President-elect Trump's threats of higher tariffs on Canadian products, are an additional weight to the Loonie.
 

Cautious easing by the Fed vs large rate cuts by the BoC

The US Federal Reserve is widely expected to cut its benchmark interest rate by 25 basis points on Wednesday and to proceed cautiously next year. The CME Fed watch tool shows between one or two more rate cuts next year as the most likely scenario.

The Bank of Canada, on the contrary, slashed interest rates by 50 bps last week in the second such consecutive move. The Bank has slashed rates by 1.75% to the current 3.25% since June and is likely to trim them lower. Governour Macklem will speak later today and he might support that view.

On the Other hand, the US Dollar is looking for direction as the impact of the stronger-than-expected US employment figures waned. Markets are pricing a nearly 90% chance that the Fed will cut rates by 25 basis points next week, which is keeping US Dollar rallies limited.

In Canada, the BoC meets this week and is expected to deliver a large rate cut on Wednesday. Downbeat Canadian Employment and business activity figures sustain that view. This is likely to weigh on a deeper CAD recovery.
 

USD/CAD Technical Analysis: Above 1.4250, the target is 1.4315

The Canadian Dollar is trading within a bullish channel. Technical indicators are positive, but the 1.4250/60, where the 127.20% Fibonacci extension meets the channel top might take some time to give up.
Above here, the next target would be the 161.8% Fibonacci level, at 1.4315. Supports are at 1.4200 (December 11 high) and December 12 low at 1.4235.

USD/CAD 4 Hour Chart

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