USD/CAD rises above 1.4400 as traders adopt caution ahead of Fed decision
- USD/CAD extends gains as the Fed is widely anticipated to maintain its current rates on Wednesday.
- The pair rises due to the potential for a widening interest rate differential between the US and Canada.
- The commodity-linked CAD could have struggled amid weaker crude Oil prices.
USD/CAD gains ground for the third consecutive day, trading around 1.4420 during the European hours on Wednesday. The pair may further appreciate as the US Dollar (USD) receives support from the Federal Reserve’s (Fed) cautious stance regarding upcoming Wednesday’s policy decision.
According to the CME FedWatch tool, market expectations indicate nearly 100% certainty that the Fed will maintain its policy rate within the target range of 4.25%-4.50%. However, traders will be closely monitoring Fed Chair Jerome Powell’s press conference for any hints regarding the future direction of monetary policy.
The Canadian Dollar (CAD) is under pressure due to diverging monetary policy expectations, as traders anticipate a widely expected rate cut from the Bank of Canada (BoC) while the US Federal Reserve is expected to hold rates steady later in the North American session.
The USD/CAD pair gained support from increased risk aversion following tariff threats made by US President Donald Trump. The risk-sensitive CAD weakened following renewed concerns over US trade policy after President Donald Trump threatened over the weekend to impose a 25% tariff on Canadian goods starting February 1.
This potential tariff threat has sparked fears of major trade disruptions with the United States, Canada’s largest trading partner, potentially reducing foreign exchange inflows, particularly in the manufacturing sector.
Additionally, the commodity-linked CAD may have faced additional downward pressure from declining crude Oil prices, as Canada is the largest crude exporter to the United States. Oil prices have fallen amid investor concerns over the broader economic impact of tariffs on Canada, Mexico, and China, which could weaken global energy demand and overall economic growth.
(This story was corrected on January 29 at 08:30 GMT to say, in the third paragraph, that the Fed is expected to hold rates steady later in the North American session, not tomorrow.)
Tariffs FAQs
Tariffs are customs duties levied on certain merchandise imports or a category of products. Tariffs are designed to help local producers and manufacturers be more competitive in the market by providing a price advantage over similar goods that can be imported. Tariffs are widely used as tools of protectionism, along with trade barriers and import quotas.
Although tariffs and taxes both generate government revenue to fund public goods and services, they have several distinctions. Tariffs are prepaid at the port of entry, while taxes are paid at the time of purchase. Taxes are imposed on individual taxpayers and businesses, while tariffs are paid by importers.
There are two schools of thought among economists regarding the usage of tariffs. While some argue that tariffs are necessary to protect domestic industries and address trade imbalances, others see them as a harmful tool that could potentially drive prices higher over the long term and lead to a damaging trade war by encouraging tit-for-tat tariffs.
During the run-up to the presidential election in November 2024, Donald Trump made it clear that he intends to use tariffs to support the US economy and American producers. In 2024, Mexico, China and Canada accounted for 42% of total US imports. In this period, Mexico stood out as the top exporter with $466.6 billion, according to the US Census Bureau. Hence, Trump wants to focus on these three nations when imposing tariffs. He also plans to use the revenue generated through tariffs to lower personal income taxes.
Author
Akhtar Faruqui
FXStreet
Akhtar Faruqui is a Forex Analyst based in New Delhi, India. With a keen eye for market trends and a passion for dissecting complex financial dynamics, he is dedicated to delivering accurate and insightful Forex news and analysis.
