USD Stays Strong vs CAD Ahead of FOMC Minutes

Key Moments

USD/CAD stayed supported above the mid-1.3700s after retreating from the 1.3775 area, its highest level since mid-April.
Geopolitical tensions and expectations of a Federal Reserve rate hike in 2026 continued to bolster the US Dollar and US Treasury yields.
Firm Crude Oil prices helped cushion the Canadian Dollar despite weaker Canadian inflation data.

USD/CAD Steadies After Pullback From Multi-Week High

The USD/CAD pair attracted fresh buying interest during the Asian session on Wednesday, halting the late-session decline seen the previous day from the 1.3775 region, which marked its highest level since mid-April. The exchange rate last traded just above the mid-1.3700s, with price action underpinned by continued strength in the US Dollar.

Support for the Greenback remained intact as market participants maintained a constructive bias following the earlier climb in the USD Index (DXY) to its strongest level since April 7. The DXY, which measures the US Dollar against a basket of major currencies, advanced on the back of persistent geopolitical uncertainty and expectations for a more hawkish stance from the US Federal Reserve.

Geopolitics, Fed Expectations, and Bond Yields Support the USD

Geopolitical dynamics continued to play a central role in driving demand for the safe-haven US Dollar. US President Donald Trump delayed a planned attack on Iran after a request from three Gulf leaders, while still indicating that the US may need to strike Iran again.

At the same time, peace negotiations have remained blocked amid substantial disagreements over Tehran’s nuclear program and the strategically important Strait of Hormuz. These unresolved issues kept geopolitical risks elevated and helped sustain safe-haven flows into the US Dollar.

The stand-off between the US and Iran also supported Crude Oil prices, which remained close to a monthly high. Higher energy prices fed inflation concerns and reinforced market expectations that the US central bank could move toward tighter policy.

According to the CME Group’s FedWatch Tool, market participants were pricing in more than a 55% probability that the Federal Reserve would increase borrowing costs by at least 25 basis points in 2026. This outlook contributed to holding US Treasury yields at elevated levels, providing an additional tailwind for the Greenback and the USD/CAD pair. Nonetheless, some US Dollar bulls were cautious ahead of the release of the FOMC Minutes.

Oil Prices Offset Weak Canadian Inflation, Limiting CAD Losses

For the Canadian Dollar, higher Crude Oil prices helped counterbalance Tuesday’s softer-than-expected Canadian consumer inflation data. As a commodity-linked currency, the Loonie often tracks moves in energy markets, and the ongoing strength in Oil prices helped curb deeper downside in the currency.

Even so, the overall macro backdrop remained more supportive for the US Dollar than for the Canadian Dollar. Against this setting, any corrective decline in USD/CAD appeared likely to attract renewed buying interest, with the prevailing bias favoring further gains in the pair.

Market Drivers at a Glance

Factor	Impact on USD/CAD
Geopolitical tensions involving Iran	Boosted safe-haven demand for USD, supporting USD/CAD
Fed rate hike expectations (2026)	Raised probability of at least a 25 bps increase, underpinning USD strength
US Treasury yields	Stayed elevated, adding to USD support
Crude Oil prices	Remained close to monthly highs, helping limit CAD downside
Canadian inflation data	Softer-than-expected figures weighed on CAD but impact was offset by Oil

Canadian Dollar – Background and Key Influences

The Canadian Dollar (CAD) is influenced by several core factors, including interest rate settings by the Bank of Canada (BoC), the trajectory of Oil prices, domestic economic performance, inflation trends, and the country’s Trade Balance, which reflects the difference between export and import values. Broader market sentiment also plays a role: a risk-on environment tends to favor the CAD, while risk-off conditions can pressure it. Given the close economic ties between Canada and the United States, the health of the US economy is another critical input for CAD movements.

Role of the Bank of Canada

The Bank of Canada exerts significant influence over the Canadian Dollar via its control of benchmark interest rates, which guide lending costs across the financial system. The central bank aims to keep inflation within a 1-3% range by adjusting rates higher or lower. Generally, relatively higher interest rates are considered supportive for the CAD. In addition to traditional rate moves, the BoC can employ quantitative easing or quantitative tightening to alter credit conditions, with the former usually weighing on the CAD and the latter typically providing support.

Oil Prices and the Canadian Dollar

Oil prices are a central driver for the Canadian Dollar, as petroleum is Canada’s largest export. Movements in Oil can quickly translate into shifts in CAD demand. Rising Oil prices tend to coincide with appreciation in the Canadian Dollar, while falling prices often have the opposite effect. Stronger Oil markets can also improve Canada’s Trade Balance, which is generally positive for the currency.

Inflation, Economic Data, and Currency Dynamics

In the current environment of open capital flows, higher inflation can prompt central banks to raise interest rates, attracting foreign capital seeking higher returns. For Canada, firmer inflation that leads to rate increases can support the Canadian Dollar by drawing international investment.

Macroeconomic indicators such as GDP, Manufacturing and Services PMIs, employment releases, and consumer sentiment surveys are closely monitored for signals about the health of the Canadian economy. Robust data can enhance prospects for tighter monetary policy and greater foreign investment, generally benefiting the CAD. Conversely, weaker readings tend to pressure the currency as expectations for growth and interest rates are marked down.