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USD/CAD is perking up, reflecting a shift in the forces that were undermining US dollar confidence.
- Fed’s Lisa Cook may retain governor posting
- Greenland framework eases geopolitical fears
- Fed pricing signals fewer rate cuts in 2026
- USD/CAD reversal off 1.3800 adds to upside risk
Summary
USD/CAD just staged a sharp reversal, and the reason matters: political and geopolitical risks that were weighing on the dollar are fading fast. The Supreme Court may allow Lisa Cook to stay on as Fed governor, reducing the threat of political interference. Meanwhile, the Greenland framework has cooled transatlantic tensions. Together, these shifts are supporting the USD, with the pair bouncing off 1.3800 and eyeing 1.3860 and beyond. Technicals are neutral, so price action around the 200-day moving average is key.
Fed Independence, Geopolitical Fears Fade
The Supreme Court hearing on President Trump’s attempt to remove Fed Governor Lisa Cook began on Wednesday, focusing on whether mortgage fraud allegations are sufficient grounds to dismiss a sitting Fed official. While Cook is already permitted to remain in her role while the case proceeds, the early tone from justices across the political spectrum points to a low likelihood that her removal will be upheld. That matters for markets.
The risk of a first-ever Fed governor dismissal has been a clear headwind for the US dollar, and the hearing suggests that risk is now receding.
From a Fed independence perspective, this is significant. Cook’s term runs well into the next decade, and her likely retention limits the scope for a rapid reshaping of the Board of Governors, even if leadership changes elsewhere. Combined with the past behaviour of Trump-appointed governors Christopher Waller and Michelle Bowman, the risk of monetary policy being driven by politics rather than data looks less than markets had feared. In short, the Fed independence risk discount embedded in the dollar has faded.
At the same time, geopolitical risk has eased following developments around Greenland. President Trump said a framework has been reached that would involve ceding some territory to the United States, allowing for US military installations linked to the proposed Golden Dome, and granting long-term mineral rights under a deal he described as lasting “forever.”
While European leaders have yet to confirm the details, NATO Secretary General Mark Rutte said discussions between both sides were constructive on the sidelines of the World Economic Forum in Davos. This has reduced fears of a transatlantic escalation, including Europe weaponising their capital markets by triggering their anti-coercion instrument.
Put together, the ingredients for a ‘Sell America 2.0’ episode like the one seen after the Liberation Day tariff announcement have faded. With Fed independence concerns receding, geopolitical risks de-escalating, and the US economy still outperforming most of the developed world, the backdrop is more supportive for renewed USD strength.
Fed Rate Cut Pricing Fades
Source: TradingView
That shift is also showing up in market pricing. Based on the shape of the futures curve, traders are now pricing around 45 basis points of rate cuts from the Federal Reserve this year, or less than two full 25bp moves. Back in late November, the market was pricing close to double that amount, reflecting a far more aggressive easing outlook.
The repricing matters because it cuts directly against the idea that markets are worried about political interference forcing the Fed’s hand. If Fed independence concerns were front of mind, investors would be leaning toward faster and deeper cuts. Instead, pricing points to confidence that policy will remain guided by the data, not politics, reinforcing the broader support building behind the US dollar.
Busy Calendar, Limited Relevance
Source: TradingView (United States ET)
That backdrop is unlikely to shift on Thursday, even with a busy US data docket. Most of the releases are heavily dated and unlikely to materially alter Fed pricing. The PCE report covers November and lands at a time when markets are already in late January. Even when released on schedule, CPI and PPI tend to carry far more weight for Fed expectations than core PCE, despite it being the Federal Reserve’s preferred inflation gauge.
The same applies elsewhere. The final read of Q3 GDP is effectively ancient history, while weekly jobless claims risk being distorted by the timing of the MLK long US weekend, which can temporarily skew claimant numbers. As such, there is little in the data to challenge Fed pricing.
That’s important for USD/CAD because it’s demonstrated a reasonably tight relationship with short-dated interest rate differentials between the United States and Canada over the past quarter, which are heavily influenced by monetary policy expectations. The correlation coefficient between USD/CAD and two-year spreads sits at 0.84 using a daily timeframe, indicating a strong and likely meaningful relationship between the two.
USD/CAD Delivers Bullish Reversal Signal
Source: TradingView
In the wake of the Cook and Greenland news, USD/CAD staged a dramatic turnaround after probing beneath 1.3800 earlier in the session, rocketing higher to deliver a hammer candle on the daily. That points to upside risks, with the early price action in Asia suggesting we may see an extension of the bullish move, putting a completion of a possible three-candle morning star reversal pattern on the table. If that were to play out, it would double down on the bullish reversal messaging.
For now, concentrate on price action around the key 200-day moving average. The proximity of this level to the price allows it to be used to build trades around, allowing for stops to be placed on the opposite side to entry for protection.
Given the bullish signal, longs could be set above the 200DMA targeting 1.3860 initially. Beyond that, the 50DMA or 1.3926 are other options for those seeking greater risk/reward from the trade. All have been respected by the price in recent times.
While it goes against the bullish signal, if USD/CAD reverses back beneath the 200DMA and holds there, it would allow for shorts to be set with a stop above, targeting a retest of 1.3800. This setup screens as a lower probability play.
The message from RSI (14) and MACD is entirely neutral, putting more emphasis on price action when assessing potential setups.