USD/CAD: A Bearish Break Below 1.3720 Signals Fresh Downside Potential

The USD/CAD pair has entered a critical juncture as technical and macroeconomic factors align to reinforce a bearish bias. A confirmed breakdown below the 1.3720 support level, coupled with diverging monetary policies between the U.S. Federal Reserve (Fed) and the Bank of Canada (BoC), has created a high-probability environment for further depreciation. This analysis synthesizes technical price action, momentum indicators, and central bank policy dynamics to outline a compelling short-term bearish case.

Technical Analysis: Breakdown Below 1.3720 Validates Downtrend

The 1.3720 level has long served as a pivotal support for USD/CAD, and its recent breach marks a key technical confirmation of a bearish shift. According to a report by TradingView, the pair has consolidated below the 1.3800 psychological level, with sellers dominating price action as buyers struggle to establish a foothold for a rebound. A decisive close below 1.3720 would likely trigger a cascade of stop-loss orders and reinforce the validity of the downtrend, with immediate targets at 1.3660 and 1.3570.

Technical indicators corroborate this bearish narrative. The Moving Average Convergence Divergence (MACD) remains below its signal line, signaling sustained downward momentum. Meanwhile, the Relative Strength Index (RSI) hovers near 38, indicating the pair is not yet oversold and has room for further declines. This combination of bearish momentum and broken key support suggests that USD/CAD is more likely to test deeper levels in the near term.

However, traders should remain cautious of short-term volatility. If the price holds above 1.3720, a corrective rebound toward 1.3820 could materialize. Yet, a sustained break below this level would invalidate such a scenario and open the door to a test of 1.3650 and 1.3600.

Macroeconomic Drivers: Fed-BoC Policy Divergence Fuels CAD Strength

The bearish technical setup is amplified by diverging monetary policy trajectories. The BoC has maintained a hawkish bias, keeping its policy rate at 2.25% in December 2025 after a 25-basis-point cut in October. This decision reflects the BoC's confidence in Canada's economic resilience, including a 2.6% GDP rebound in Q3 2025 and a 16-month low unemployment rate of 6.5% in November. Despite U.S. trade policy headwinds-such as steep tariffs on Canadian steel and lumber-the BoC has signaled that its current rate is appropriate to balance growth and inflation, which remains near its 2% target.

In contrast, the Fed has adopted a more cautious stance amid stagflation risks and trade tensions. Policymakers have emphasized the need for "greater clarity" before adjusting rates, suggesting a slower pace of easing compared to the BoC. This divergence creates a structural advantage for the Canadian dollar, as higher relative interest rates attract carry-trade flows and strengthen demand for CAD assets.

High-Probability Trade Setups

For short-term bearish positioning, traders can consider the following strategies:
1. Short Entry Below 1.3720: A confirmed close below this level (with a stop-loss above 1.3750) targets 1.3660 and 1.3570.
2. Bearish Breakout Plays: Aggressive traders may initiate shorts near 1.3770, a recent consolidation zone, with a stop above 1.3820.
3. Momentum-Based Shorts: The MACD's bearish crossover and RSI's sub-40 reading justify entries with tight stops, targeting a 5-7% decline over the next 2-4 weeks.

Conclusion

The USD/CAD pair is at a pivotal inflection point, with technical and macroeconomic factors converging to support a bearish outlook. A breakdown below 1.3720, reinforced by weak momentum indicators and BoC-driven CAD strength, presents a high-probability trade for short-term sellers. While short-lived rebounds cannot be ruled out, the broader trend favors further depreciation toward key support levels. Traders should monitor BoC policy statements and Fed rate expectations for potential catalysts that could extend or reverse this bearish trajectory.