USD/CAD Holds Firm as Trade Risks Offset Rising Oil

Key Moments

USD/CAD Holds Firmer Tone but Lacks Clear Bullish Follow-Through

The USD/CAD pair is maintaining a mildly positive tone for the second session in a row, trading near the mid-1.3800 area during Asian hours on Tuesday. Despite this constructive bias, price action remains cautious, as competing fundamental drivers make traders reluctant to fully commit to extending the rebound from last week’s three-month low.

Inflation concerns linked to volatile energy markets are keeping alive market expectations for at least one interest rate increase by the Federal Reserve in 2026. At the same time, persistent geopolitical tensions are helping the US Dollar recover from its weakest levels since mid-May, offering additional support to USD/CAD. However, the simultaneous rise in crude oil prices is lending some backing to the Canadian Dollar and limiting the pair’s upside.

Geopolitical Risks and Oil Market Dynamics

The geopolitical risk premium remains elevated amid intensifying frictions between the United States and Iran. Treasury Secretary Scott Bessent announced Monday that the US is launching a campaign to isolate Iran from the global economy and warned that any country conducting business with Iran risks facing US sanctions. Iran’s Supreme National Security Council secretary, Mohsen Rezaei, had said that the Islamic Republic would halt all oil exports through the Strait of Hormuz if economic war continued.

These developments are seen as supportive for crude oil prices while simultaneously underpinning demand for the safe-haven US Dollar. For the Canadian Dollar, which is closely tied to commodity performance, higher oil prices would typically be a tailwind. Yet that support is being counterbalanced by rising concerns over the US-Canada trade relationship.

US-Canada Trade Conflict Weighs on the Loonie

Market sentiment toward the Canadian Dollar is being undermined by fears of a worsening trade confrontation between the US and Canada. The US imposed 50% tariffs on $20bn of Canadian imports on Saturday after bilateral negotiations broke down on Friday. In response, Canadian Prime Minister Mark Carney stated that Canada will introduce retaliatory tariffs starting September 8.

Strategists at Scotiabank report that the “abrupt collapse of US/Canada trade talks at the 11th hour on Friday has torpedoed the positive sentiment that had developed around the CAD over the past four weeks and heralds a period of more intense uncertainty about our relationship with the US.” They add that the Canadian government has promised to respond “dollar for dollar” to the latest round of US tariffs and has told provincial leaders that “another round of domestic aid will be forthcoming,” underscoring the heightened policy and trade uncertainty facing Canadian businesses.

Against this backdrop, the fundamental setup leans in favor of additional near-term upside in USD/CAD. Even so, positioning remains guarded as investors await clearer signals on the Fed’s policy trajectory.

Upcoming US Data and Fed Communication in Focus

Traders appear reluctant to adopt more aggressive long-USD positions ahead of key US macro and policy events. Attention is centered on the US Personal Consumption Expenditures (PCE) Price Index release on Wednesday, which is a closely watched gauge of inflation. Additionally, Fed Chair Kevin Warsh’s keynote at the Jackson Hole Symposium on Friday is expected to provide further insight into the central bank’s future policy path.

USD/CAD Technical Picture

From a technical standpoint, USD/CAD is trading just above the 23.6% Fibonacci retracement of the June-August decline, while remaining capped by the 200-day Exponential Moving Average (EMA). This pattern supports a mildly bearish near-term bias, implying that rallies are more likely to encounter selling interest than to evolve into a sustained advance.

On the upside, initial resistance is located at the 200-day EMA near 1.3885, followed by the 38.2% Fibonacci retracement at 1.3928 and then the 50.0% retracement around 1.3988. On the downside, first support is at the 23.6% retracement level at 1.3852. A more significant support zone sits near 1.3731, where the Fibonacci anchor suggests that buyers may be inclined to step in to protect the broader uptrend.