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. Both decisions are scheduled for tomorrow.

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.