USD/CAD Struggles as Oil Jumps on Hormuz Tensions

Key Moments

Fundamental Drivers: Geopolitics vs. Oil and Rates

The USD/CAD pair attracted some buying on Monday after recent declines, but the advance lacked conviction and failed to establish acceptance above the 1.3700 area, reflecting conflicting fundamental forces in the market.

Renewed tensions between the United States and Iran around the Strait of Hormuz curbed risk appetite, creating fresh demand for safe-haven assets and lending support to the US Dollar and the currency pair. At the same time, a sharp intraday surge in Crude Oil prices bolstered the commodity-linked Canadian Dollar, keeping a lid on further USD/CAD gains.

US-Iran Standoff and Risk Sentiment

The backdrop deteriorated after the US Navy intercepted and seized an Iranian-flagged cargo vessel in the Gulf of Oman as part of its blockade. Iran interpreted the move as a violation of the ceasefire agreement and responded by again closing the strategically important waterway, which had been briefly reopened following a 10-day truce between Israel and Hezbollah that ended on Friday.

Adding to the tensions, US President Donald Trump said that the naval blockade of Iranian ports would remain in place until a peace deal was reached between the two countries. According to Iranian state media, officials will not participate while the blockade continues.

This standoff has reduced expectations for an agreement before the current ceasefire expires on April 22, fueling another bout of global risk aversion. That environment has supported the US Dollar’s reserve currency role, reinforcing demand for the greenback and, by extension, the USD/CAD pair.

Inflation Concerns, Yields, and Fed Expectations

Rising concerns about inflation have pushed US Treasury yields higher, adding another tailwind for the US Dollar and offering additional support to USD/CAD. However, expectations for US monetary policy remain mixed.

While higher yields might typically encourage more aggressive US Dollar buying, moderating expectations for another rate hike by the Federal Reserve have limited the enthusiasm of USD bulls. Data from the CME Group’s FedWatch Tool indicated roughly a 40% probability of a Fed rate cut by year-end, restraining the upside in the currency and helping contain USD/CAD within a range.

Oil Price Recovery Supports the Loonie

The instability surrounding what is described as the world’s most critical maritime chokepoint for energy has helped Crude Oil regain a significant portion of Friday’s losses, when prices fell to their lowest level since March 11. This rebound in Oil prices has underpinned the Canadian Dollar, given its status as a major oil exporter, and acted as a counterweight to US Dollar strength.

The combination of firmer Oil prices and tempered expectations for further Fed tightening has contributed to a constrained trading environment for USD/CAD, with neither bulls nor bears able to firmly seize control.

Data Watch: Canadian Inflation and Geopolitical Headlines

Given the conflicting drivers, market participants are cautious about calling a definitive bottom in USD/CAD after the pullback seen over roughly the past two weeks. The recent move is yet to be confirmed as complete, and traders are looking for stronger follow-through buying to validate a more durable recovery in spot prices.

Attention is turning to upcoming Canadian consumer inflation data for greater clarity on the Bank of Canada’s policy outlook. These figures, alongside any new developments in the US-Iran situation, are expected to be key catalysts for short-term moves in USD/CAD.

Technical Landscape: Key USD/CAD Levels

On the technical front, USD/CAD showed some resilience on Friday below the 61.8% Fibonacci retracement of the January-March upswing. However, the pair recently broke beneath a key confluence that included the 38.2% Fibonacci retracement and the 200-period Exponential Moving Average (EMA) on the 4-hour chart. The absence of strong follow-through buying after this breakdown suggests that bullish positions still require caution.

Momentum indicators send mixed signals. The Moving Average Convergence Divergence (MACD) histogram has turned slightly positive, indicating that downside momentum may be fading. In contrast, the Relative Strength Index (RSI) hovering near 35 reflects subdued demand, implying that rallies could face headwinds while the price remains constrained by overhead technical barriers.

On the upside, the first notable resistance is at the 50.0% retracement at 1.3726. Above that, a confluence zone emerges in the 1.3775-1.3785 area, followed by the 1.3800 round figure. A further obstacle lies at the 23.6% retracement near 1.3853.

On the downside, initial support is aligned with the 61.8% Fibonacci level at 1.3669. A break below this area could open the door to the 78.6% retracement at 1.3588, with a deeper decline potentially exposing the prior swing low region around 1.3485 if selling pressure intensifies.