USD/CAD Shows Bullish Reversal as Fed and Geopolitical Risks Subside
January 22, 2026 – By David Scutt, Market Analyst
The USD/CAD currency pair has demonstrated a significant bullish reversal, fueled by easing political and geopolitical concerns that had previously cast a shadow over the U.S. dollar. The recent developments around the Federal Reserve and an improved geopolitical framework regarding Greenland have contributed to renewed confidence in the greenback, pushing USD/CAD higher after touching support near 1.3800. ### Federal Reserve Independence Concerns Ebb
A central factor easing pressure on the U.S. dollar has been the Supreme Court’s handling of the case concerning Fed Governor Lisa Cook. The court is deliberating whether President Trump’s attempt to remove her—based on mortgage fraud allegations—is legally justifiable. Notably, Cook remains in her position during these proceedings, and early indications suggest the court is unlikely to uphold the removal.
This outcome is significant for market participants, as the unprecedented move to dismiss a sitting Federal Reserve governor had been a notable source of political uncertainty weighing on the dollar. Cook’s likely retention secures a degree of stability within the Fed’s Governing Board, as her term extends into the next decade. This continuity reduces fears that monetary policy decisions could be unduly influenced by political pressures rather than economic data.
The presence of other Trump-appointed governors who have demonstrated independent policy stances, such as Christopher Waller and Michelle Bowman, further diminishes market worries of a politicized Federal Reserve. As a result, the risk premium attributed to concerns over Fed independence embedded in the dollar has markedly declined.
Greenland Agreement Calms Transatlantic Tensions
Simultaneously, geopolitical tensions have eased following revelations about a new framework concerning Greenland. President Trump announced a landmark accord involving territorial concessions to the United States, enabling military installations tied to the "Golden Dome" initiative and long-term mineral rights under a permanent deal.
While details await confirmation from European leaders, NATO Secretary General Mark Rutte described recent discussions at the World Economic Forum in Davos as constructive. This development has alleviated fears of heightened transatlantic conflicts—such as Europe potentially employing capital market sanctions via its anti-coercion instrument.
Together, the softening geopolitical stance and reduced Fed turmoil counteract the market’s prior “Sell America 2.0” narrative, first triggered by tariff announcements on Liberation Day. With the U.S. economy outpacing many developed countries, these factors combine to bolster the dollar’s outlook.
Shifts in Fed Rate-Cut Expectations
Market sentiment, as reflected in futures curves, aligns with this new reality. Traders now anticipate approximately 45 basis points of Federal Reserve rate cuts in 2026—significantly less than the near-doubling estimated back in late November. This shift underscores confidence that the Fed’s monetary policy will remain data-driven and insulated from political maneuvering rather than triggering aggressive easing.
Technical Outlook for USD/CAD
Following these fundamental shifts, USD/CAD rebounded sharply after dipping below the 1.3800 support level earlier in the session. The currency pair formed a “hammer” candlestick on the daily chart—a classic bullish reversal signal. Early trading in Asian markets hints at a possible continuation of the upward movement, potentially completing a three-candle morning star pattern that would reinforce bullish momentum.
Technical analysts should focus on the price behavior around the 200-day moving average (DMA), which is currently near the USD/CAD spot level. This moving average provides a practical reference point for trade entries and stop placement. A break and close above the 200DMA could justify long positions targeting 1.3860 initially, with further upside targets near the 50DMA or 1.3926—levels that have historically served as support or resistance.
Conversely, should the pair fail to maintain above the 200DMA and fall back below it, a short position targeting a retest of the 1.3800 support may be considered, although this scenario currently appears less probable.
Indicators such as the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) remain neutral, placing greater emphasis on price action to guide trading decisions.
Market Calendar and Data Impact
Upcoming U.S. data releases, including the November Personal Consumption Expenditures (PCE) report and final Q3 GDP numbers, are unlikely to significantly alter market expectations. The PCE data is retrospective and generally less impactful than the Consumer Price Index (CPI) or Producer Price Index (PPI) when it comes to influencing Fed policy outlooks. Additionally, distortions in weekly jobless claims due to the Martin Luther King Jr. holiday further diminish immediate data relevance.
Thus, USD/CAD’s close correlation with short-term interest rate differentials between the U.S. and Canada—which are largely driven by monetary policy bets—remains the primary market driver. Recent analysis shows a strong 0.84 correlation coefficient between USD/CAD and two-year interest rate spreads, highlighting this interdependence.
Summary:
The fading risks surrounding Federal Reserve governance and geopolitical tensions are supporting a bullish reversal in USD/CAD. Market participants appear more confident in sustained U.S. dollar strength, reflected in pricing for more moderate Fed rate cuts and improved technical signals following price action near key moving averages. Traders should monitor the 200DMA closely for decisive cues in the near term.
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