USD/CAD Rebounds as Fed Bets Offset Oil Strength

Key Moments

USD/CAD Holds Above Key Support as Week Begins

The USD/CAD pair starts the new week on a slightly firmer footing, drawing dip-buying interest after steep losses on Friday. The exchange rate recovers part of that decline, lifting back toward the 1.3925 region, which marked a nearly two-month low, and climbs above the mid-1.3900s during Asian trading. However, the advance appears constrained as competing fundamental drivers pull the pair in opposite directions.

Geopolitics and Fed Outlook Bolster the US Dollar

Market participants are looking beyond Friday’s weaker-than-expected US Nonfarm Payrolls report and are instead focusing on geopolitical risks, particularly the US-Iran standoff. This backdrop maintains a geopolitical risk premium and underpins demand for the safe-haven US Dollar, providing support to USD/CAD.

In addition, expectations that the US Federal Reserve will deliver at least one interest rate increase by the end of this year are helping the Greenback. Those expectations are being reinforced by concerns that recovering crude oil prices could fuel renewed inflation pressures, lending further support to the US currency and, by extension, the USD/CAD pair.

Oil and Canadian Data Counterbalance Greenback Strength

On the other side, continued uncertainty over the reopening of the Strait of Hormuz is keeping a firm tone under crude oil prices. Higher oil prices are typically supportive for the Canadian Dollar, given its status as a commodity-linked currency, and are currently providing a counterweight to US Dollar strength.

The Loonie is also finding support from Friday’s stronger Canadian jobs report, which further encourages demand for the currency. Together, resilient oil prices and upbeat domestic labor data are discouraging traders from committing to aggressive bullish positions in USD/CAD and are acting as a cap on any substantial upside in the pair.

Market Caution Ahead of US Inflation Data

Given these cross-currents, market participants appear reluctant to draw firm conclusions on the near-term direction of USD/CAD. It may be premature to assume that the retreat from the mid-1.4200s – which marked the year-to-date high reached in June – has fully played out. Many traders are likely to wait for a clearer signal, in the form of strong follow-through buying, before positioning for a more sustained move higher.

Investors are also expected to remain cautious ahead of this week’s US inflation releases, which could reshape expectations for the Federal Reserve’s policy path. At the same time, further news on the evolving Middle East situation is likely to influence risk sentiment, oil prices, and, by extension, both the US Dollar and the Canadian Dollar.

Technical Picture: 100-Day SMA as a Pivotal Level

On the technical front, USD/CAD continues to hold above the 100-day Simple Moving Average (SMA), currently at 1.3917. The pair’s ability to remain above this indicator suggests that underlying demand is still cushioning downside attempts, even as upside momentum appears relatively modest.

A clear move below the 100-day SMA would signal vulnerability to a more pronounced downside phase. Conversely, as long as spot prices trade above this level, market participants may continue to look to psychological round numbers and recent swing highs as benchmarks for the next layers of resistance on any further recovery.