Monetary policy divergence between the Federal Reserve and Bank of Canada remains the dominant driver of USD/CAD sentiment heading into 2026, with the Fed funds rate at 4.50% versus the BoC’s 2.25% target creating a persistent yield advantage for the U.S. dollar. Recent Canadian inflation data near 2.5% and softer growth have kept BoC easing expectations limited, while resilient U.S. activity and elevated inflation support a more cautious Fed path. Oil price volatility, tied to Middle East developments, provides a key offset as higher crude bolsters Canada’s terms of trade and CAD demand. Trade policy risks under USMCA and broader dollar movements add further uncertainty, with consensus forecasts pointing to range-bound trading near 1.35–1.38 by year-end absent major shifts in rate differentials or commodity prices.