CAD Softens as Fed Outlook, Oil Drop Lift US Dollar

Key Moments

USD Strengthens as Fed Stays Hawkish

USD/CAD extended its advance for a fourth consecutive session, holding near 1.3790 in early European hours on Friday. The pair remained underpinned by a firmer US Dollar, as markets leaned further toward a hawkish interpretation of the Federal Reserve’s policy stance.

Traders were increasingly pricing in the likelihood that the Federal Reserve will maintain interest rates at elevated levels. This shift in expectations has been linked in part to an ongoing energy shock tied to disruptions in the Strait of Hormuz, which are seen as a risk to core US consumer prices and broader inflation expectations.

Fed officials are currently leaving the federal funds rate unchanged, but policymakers are moving away from the prospect of rate cuts and signaling a growing willingness to raise rates if inflation does not moderate.

Leadership Transition at the Federal Reserve

US President Donald Trump is set to swear in Kevin Warsh as the new chair of the Federal Reserve on Friday at the White House. Warsh will take over from Jerome Powell, whose term ended on Friday. Powell has continued to serve on a pro-tempore basis until the handover is completed.

Canadian Dollar Pressured by Weakening Oil Prices

The Canadian Dollar, which is closely tied to commodity dynamics, continued to lag the US Dollar amid declining crude prices. Canada is the largest crude supplier to the United States, making the CAD particularly sensitive to oil market moves. West Texas Intermediate (WTI) crude fell for a third straight session and was trading around $96.80 at the time of writing.

Oil prices eased as supply concerns diminished on rising optimism that the United States and Iran could eventually reach an understanding. US Secretary of State Marco Rubio stated that there were “some encouraging signs” regarding a possible agreement with Iran. At the same time, senior Iranian officials indicated that, while no deal has been formally concluded with the United States, the two sides have narrowed their differences.