USD Strength Pressures Loonie Despite Rising Oil Prices

Key Moments

USD/CAD Holds Firm Near Recent Highs

The USD/CAD pair is trading with a constructive tone above the mid-1.3700 area during the Asian session on Monday, staying just under the one-month peak set last Friday. Ongoing demand for the US Dollar is providing support to the pair, while gains are being tempered by stronger Crude Oil prices, which are helping the commodity-linked Canadian Dollar contain further weakness.

Geopolitical Tensions Boost Safe-Haven Demand and Oil

In a post on Truth Social on Sunday, US President Donald Trump warned Iran that the “clock is ticking” and that there “won’t be anything left” if action is not taken soon, adding that “time is of the essence.” Separately, the Times of Israel reported that Israel and the US are moving forward with military planning that could lead to renewed coordinated strikes against Iran.

These developments are heightening concerns over a deeper escalation in the Middle East. Alongside the effective closure of the Strait of Hormuz, this backdrop is driving Crude Oil prices to a two-week high. The rise in energy prices is helping support the Canadian Dollar, limiting the upside in USD/CAD even as broader market forces favor the greenback.

Higher Fed Rate Expectations Support the US Dollar

Elevated Oil and energy costs are reinforcing worries about inflation and strengthening expectations that the US Federal Reserve may adopt a more hawkish stance. According to the CME Group’s FedWatch Tool, market participants are currently assigning more than a 50% probability to a Fed rate increase by the end of this year.

In addition to the rate outlook, persistent geopolitical uncertainty is underpinning flows into the US Dollar as a safe-haven asset, pushing it to its highest level since April 7. This combination of factors is offsetting the support the Canadian Dollar is receiving from Oil, and is helping maintain a constructive bias for USD/CAD. The overall setup continues to favor the bullish side of the pair and suggests potential for additional appreciation.

Data Calendar Quiet; Focus on Middle East and USD Flows

There are no major scheduled economic releases on Monday from either the US or Canada that are likely to move markets in a significant way. In this environment, traders are likely to focus on fresh headlines related to the Middle East situation, which could continue to drive volatility across risk assets and Crude Oil.

At the same time, broader US Dollar dynamics are expected to remain a key driver for short-term moves in USD/CAD. Given the current fundamental backdrop, the prevailing bias for the pair is that the path of least resistance remains tilted to the upside.

USD/CAD and Market Drivers Overview