USD/CAD Steadies as Oil Rally Counters Fed Uncertainty

Key Moments

FX Overview

USD/CAD showed only limited movement around 1.4060 during Asian trading on Wednesday, stabilizing after four straight sessions of losses. The pair is being pulled in opposite directions as a firm US Dollar meets a Canadian Dollar supported by sharply higher crude prices.

The advance in oil has reinforced inflation concerns, supporting safe-haven demand for the Greenback. At the same time, the commodity-linked Canadian Dollar stands to benefit from stronger energy markets, which may restrict further upside in USD/CAD.

Oil Market Driven by Geopolitics and Diplomacy

Crude prices extended gains as market participants processed conflicting signals on diplomatic efforts between the United States and Iran. While negotiations are described as ongoing, sentiment has been unsettled by developments following high-level talks.

Pakistan’s army chief, Field Marshal Asim Munir, met senior Iranian diplomatic and military officials in Tehran to discuss bilateral relations and the status of discussions with Washington. A diplomat involved in those talks clarified that efforts to end the conflict continue, while rejecting suggestions that a final deal was close.

Oil has climbed more than 10% this month amid accumulating global supply threats. Tensions involving Saudi Arabia, Iran-backed Houthi forces, Russia, and Ukraine have added to geopolitical risk. Those concerns have been compounded by at least 18 attacks on vessels in the Strait of Hormuz in the last two weeks.

Despite the security backdrop, energy infrastructure has shown resilience, with Middle Eastern crude flows reportedly back to around 80% of prewar levels.

Fed Policy Outlook and Warsh’s Comments

Market participants are also focused on the Federal Reserve’s policy path following recent remarks from Fed Chair Kevin Warsh. Warsh stressed that he does not “prejudge” future rate decisions, providing no explicit guidance on whether policymakers will hike or hold rates at the upcoming October meeting.

The tone of the speech was described as moderately constructive without being strongly hawkish, reflected in an FXS Speechtracker score of 5.6/10, slightly below the historical average of 6.1/10. Warsh acknowledged being “over-scarred from the global financial crisis,” signaling a persistent tilt toward caution on financial stability. At the same time, he pointed to structural growth momentum and an investment upswing driven by “good policies.”

Warsh highlighted artificial intelligence both as a near-term driver of demand and as a tool to enhance confidence in economic data. His refusal to pre-commit on upcoming meetings underscores a data-dependent stance that tempers explicit policy signaling for the US Dollar.

The broader policy signal remains firm. The FXS Fed Sentiment Index was unchanged, moving 0.00 points to 127.51, which is still elevated. This suggests that, despite the marginally softer speech tone, the overarching narrative stays in hawkish territory. For currency markets, the mix of high sentiment readings and Warsh’s lingering crisis caution implies the Dollar remains supported by expectations of ongoing vigilance on inflation and financial stability rather than a swift dovish shift.

USD/CAD Technical Picture

On the daily chart, USD/CAD trades at 1.4060, maintaining a bearish short-term configuration as spot holds below both the 50-day and nine-day Exponential Moving Averages (EMAs). The 14-day Relative Strength Index (RSI) has eased to around 42.7, signaling waning upside momentum after the latest retreat from the highs. Meanwhile, the FXS Fed Sentiment Index reading near 127.5 indicates that the policy premium embedded in the Dollar has moderated versus earlier in the upswing, though it remains elevated.

On the upside, initial resistance is located at the 50-day EMA at 1.4075. Above there, stronger supply is expected around the nine-day EMA at 1.4140, with these moving averages acting as barriers to any near-term recovery attempts. A more substantial hurdle is seen at horizontal resistance near 1.4794, a key level where the broader uptrend would face a significant challenge if buyers attempt to extend gains.

Canadian Dollar: Structural Drivers

The Canadian Dollar is influenced by several core factors described in the article: Bank of Canada (BoC) policy settings, crude oil prices, the state of the domestic economy, inflation trends, and the trade balance. Market risk appetite also plays a role, with risk-on environments typically favoring the CAD, while risk-off phases tend to weigh on it. Given Canada’s close economic ties with the United States, US economic conditions are another key input.

Adjustments to the BoC’s policy rate shape funding costs across the economy and are aimed at keeping inflation within a 1-3% band. Higher relative interest rates are generally constructive for the Canadian Dollar. The BoC can additionally influence financial conditions via quantitative easing or tightening, which historically has been CAD-negative and CAD-positive, respectively.

Oil remains a central driver due to its status as Canada’s largest export. Rising crude prices typically support the CAD by improving export revenues and the trade balance, while falling prices tend to have the opposite effect.

Inflation dynamics and macroeconomic data releases, such as GDP, PMIs, labor market figures, and confidence indicators, feed into expectations for BoC policy. Strong data can attract foreign capital and potentially lead to higher rates, bolstering the currency, whereas weaker outcomes tend to pressure the CAD.