Canadian Dollar Holds Firm as Fed Hike Bets Fade

Key Moments

USD/CAD Steady as Currency and Commodity Forces Offset

USD/CAD traded largely unchanged around 1.3940 during Asian hours on Thursday, after posting modest gains the previous day. The pair moved in a tight band as a softer U.S. Dollar offset pressure on the Canadian Dollar stemming from lower crude prices, a key driver for the commodity-linked currency.

U.S. Inflation Data Eases Pressure for Aggressive Fed Action

The U.S. Dollar continued to face selling interest following the release of July Consumer Price Index data, which indicated a broad-based moderation in inflation. The softer reading reduced expectations that the Federal Reserve will pursue a more forceful interest rate increase in September.

Data from the Bureau of Labor Statistics showed headline CPI rising 3.4% year-on-year in July, easing from 3.5% in the prior month. Core CPI, which excludes food and energy, increased 2.5% year-on-year after a 2.6% rise in June. Both metrics aligned with market expectations.

Market Pricing for Fed Path Shifts After CPI

Following the inflation report, interest-rate markets recalibrated expectations for the Fed’s policy trajectory. Based on the CME FedWatch tool, swaps markets were assigning roughly a 40.1% probability to a rate hike in September. The implied likelihood of an October move fell to about 60% from 75% the day before, with the next fully priced hike pushed out to December.

Details on July CPI: Energy and Food Lead Disinflation

Commentary from TD Securities highlighted that July U.S. consumer price gains were broadly in line with consensus. The firm noted that the headline index increased “0.1% m/m (0.074% before rounding; TD: 0.15%, consensus: 0.1%).”

Strategists attributed the modest rise in large part to continuing declines in energy prices and slower food inflation, stating it was “partly explained by still retreating energy prices (gasoline -3% m/m) and slowing food inflation,” which helped restrain overall price pressures through the month.

Oil Market Outlook Pressures CAD

The Canadian Dollar faced headwinds from declining crude prices after major energy agencies cut their 2026 global demand projections, citing disruptions linked to the US-Israeli war on Iran. In its monthly oil market report released Wednesday, OPEC lowered its 2026 estimate for world oil demand growth to 580,000 barrels per day.

The International Energy Agency took an even more downbeat view, projecting a 1.6 million barrels per day contraction in oil consumption this year. This marked a sharp downgrade from its earlier forecast of a 1 million barrels per day decline.

Geopolitics and U.S. Strategy on Iran

Geopolitical tensions in the strategic maritime corridor near Iran remained elevated. President Donald Trump said the United States has “total control” over the key waterway amid intensifying rhetoric between Washington and Tehran, while diplomatic efforts were described as stalled.

At the same time, the Trump administration has been seeking to increase pressure on Iran through economic and military levers, as prior actions have not secured the desired policy changes. Planned steps include expanding economic sanctions and instituting a naval blockade intended to curb Iranian oil exports.

Euro Overview and Key Drivers

The Euro serves as the official currency for 20 European Union member states within the Eurozone. It is the second most actively traded currency globally after the U.S. Dollar. In 2022, it represented 31% of all foreign exchange transactions, with average daily turnover in excess of $2.2 trillion.

The EUR/USD pair is the most heavily traded currency cross worldwide, accounting for an estimated 30% of total FX transactions. Other major Euro pairs include EUR/JPY at 4%, EUR/GBP at 3%, and EUR/AUD at 2% of global volume.

Role of the ECB in Euro Dynamics

The European Central Bank (ECB), headquartered in Frankfurt, Germany, is the central bank for the Eurozone and is responsible for monetary policy. Its primary objective is price stability, which encompasses controlling inflation and, when necessary, supporting economic growth. The ECB primarily uses interest rate adjustments to achieve this mandate.

Relatively elevated interest rates – or expectations that rates will rise – typically support the Euro, while lower rates tend to weigh on the currency. Monetary policy decisions are taken by the ECB Governing Council, composed of the heads of Eurozone national central banks and six permanent members, including ECB President Christine Lagarde. The Council convenes eight times per year to set policy.

How Inflation and Economic Data Affect the Euro

Inflation in the Eurozone is tracked through the Harmonized Index of Consumer Prices (HICP). When inflation exceeds expectations, particularly above the ECB’s 2% target, the central bank may be compelled to raise interest rates to bring price growth back toward its objective. Higher rates relative to other major economies typically enhance the Euro’s attractiveness to global investors.

Macro data releases are also important for Euro valuation. Indicators such as gross domestic product (GDP), Manufacturing and Services Purchasing Managers’ Indexes (PMIs), employment statistics, and consumer sentiment surveys provide insight into the health of the Eurozone economy.

• Stronger data can bolster the Euro by signaling robust growth and potentially prompting tighter monetary policy.
• Weaker figures often pressure the currency, both due to growth concerns and the possibility of looser policy.

Economic performance in the four largest Eurozone economies – Germany, France, Italy, and Spain – is particularly influential, as they collectively account for 75% of the bloc’s output.

Trade Balance and Its Impact on the Euro

The trade balance is another key release for Euro watchers, measuring the gap between export revenues and import expenditures over a given period. A positive trade balance, where exports exceed imports, tends to support a currency because foreign buyers must purchase that currency to pay for goods. Conversely, a negative balance can weigh on the currency.