Oil Rally Lifts CAD as Rate Bets Keep USD/CAD Steady

Key Moments

CAD Supported by Oil Spike and Stable Rate Spreads

USD/CAD is trading near 1.3870 during Asian hours on Monday, breaking its three-session winning streak as renewed strength in crude oil prices offers a tailwind to the Canadian Dollar (CAD). The pullback in the pair comes as energy markets react to fresh supply disruptions in Saudi Arabia.

Crude prices are moving toward nearly four-month highs after a drone attack forced Saudi Arabia to shut a major crude pipeline. The incident has significantly affected a key route often used to bypass the Strait of Hormuz. In response to Thursday’s attacks, Saudi authorities immediately halted operations on the East-West pipeline as a precaution, and there has been no indication yet of when flows will return to normal.

Analysts at Scotiabank highlight that short-dated rate differentials are also helping to underpin the Canadian Dollar. They note that “front-end US/Canada spreads have held quite stable in the past few days, despite the elevated focus on US rate policy,” a development they suggest “should provide some anchoring for the CAD in the short run.”

Fed Expectations Bolster the US Dollar

Despite the CAD-positive backdrop from oil and front-end spreads, USD/CAD remains vulnerable to renewed upside if the US Dollar (USD) strengthens on the back of hawkish Federal Reserve expectations. Aggressive bets on further tightening ahead of Wednesday’s decision are offering the USD additional support.

According to market pricing, investors now assign nearly an 87% probability to a 25-basis-point rate increase at the Federal Reserve’s September meeting, up from 59% one week earlier, as reflected by the CME FedWatch tool. The shift in expectations follows the latest US inflation data, which reinforced the case for additional policy tightening.

US Inflation Data Reinforces Hawkish Bias

Figures from the Bureau of Labor Statistics released on Friday show that the US Consumer Price Index (CPI) rose 0.4% month-on-month in August, bringing the annual rate to 3.4%. Both readings matched consensus forecasts and strengthened the view that the Federal Reserve is likely to raise rates at its upcoming meeting.

The core CPI, which excludes volatile food and energy components, advanced 0.3% on a monthly basis in August, compared with 0.2% previously, and exceeded the projected 0.2%. This firmer core print has contributed to expectations of continued Fed tightening, supporting the US Dollar and limiting the downside in USD/CAD.

USD/CAD Technical Picture

On the daily chart, USD/CAD is holding near 1.3870. The pair is finding resistance from the 50-day Exponential Moving Average (EMA), while prices are trading just above the short-term nine-day EMA at 1.3842. The 14-day Relative Strength Index (RSI) sits at 49, indicating neutral momentum and pointing to a consolidation phase below the medium-term trend line rather than a clear bullish breakout.

From a technical standpoint, a daily close above the 50-day EMA at 1.3913 would be required to remove the current topside cap and pave the way for a more sustained move higher. On the downside, immediate support is located at the nine-day EMA at 1.3842. A break back below this level would likely intensify selling pressure and leave the pair exposed to a retest of recent lows, keeping USD/CAD on the back foot as long as it trades beneath its primary trend gauge.