USD/CAD declines to near 1.3890 in Monday’s Asian session. US military forces have conducted strikes on Iranian launchers located on Larak Island. Expectations for a September rate hike by the Federal Reserve have increased in the wake of Warsh’s remarks. The USD/CAD pair declines to approximately 1.3890 during the Asian trading hours on Monday. Renewed tensions between the US and Iran have led to an increase in crude oil prices, thereby bolstering the commodity-linked Canadian Dollar against the US Dollar. Market participants are anticipating the release of employment reports from the United States and Canada, scheduled for Friday. US officials announced on Sunday that American forces targeted two Iranian launchers located on Iran’s Larak island, representing the first confirmed American military actions against Iran since late July, according to the source. Iran’s Islamic Revolutionary Guard Corps reported that the attack on Sunday resulted in casualties, both killed and wounded, and pledged to enact “response and punishment”. Iranian military subsequently announced that it had executed an assault on US military installations in Jordan.
It is important to recognise that Canada stands as a significant player in the oil export market, and elevated crude oil prices typically exert a favourable influence on the CAD. However, hawkish Federal Reserve rhetoric could provide some support to the Greenback. Fed Chairman Kevin Warsh cautioned on Friday at the Jackson Hole economic symposium that inflation is not decelerating substantially, and that unless policymakers gain assurance of this, the central bank has “work to do.” Scotiabank strategists observe that recent Canadian economic releases have consistently exceeded expectations, indicating that “solid data is perhaps already priced in to the CAD to a degree, given that domestic data have generally outperformed expectations in recent weeks.” Even so, they add that the upcoming growth figures “may add modestly to CAD tailwinds in the short run,” reinforcing the currency’s underlying support without materially shifting the broader narrative. Fed Chair Warsh delivered a notably more hawkish-leaning message, with the FXS Speechtracker score at 7.4 out of 10 compared to the established baseline of 6.5 out of 10, underscoring heightened concern about price stability.
The insistence that the Fed must be confident underlying inflation is moving to objective or “we have work to do,” combined with comments that financial conditions are not restrictive and credit and loan markets show few signs of policy restraint, indicates a bias toward further tightening if inflation progress stalls. Warsh’s assertion that summer inflation data show improvement yet fail to indicate a significant shift in underlying trends, coupled with a strong reaffirmation of the 2% PCE target and a primary focus on prices, underscores a cautious approach that bolsters the Dollar and negatively impacts risk-sensitive currencies if markets anticipate further policy measures. The FXS Fed Sentiment Index remained stable, registering no change at a high level of 129.70. This stability maintains a policy tone that is decidedly hawkish, despite the absence of any incremental movement in the gauge. The combination of a high FXS Fed Sentiment Index level and an above-baseline FXS Speechtracker score indicates that markets are likely to perceive Fed communication as favouring tighter policy. This could lead to potential appreciation of the Dollar against lower-yielding currencies, particularly if forthcoming data does not substantiate a lasting disinflation trend.
In the daily chart, USD/CAD maintains a slightly bearish near-term outlook as the spot price remains just below the 20-day Bollinger middle band and the 100-day simple moving average. The pair has retreated from the upper half of the recent Bollinger envelope toward its midline, while the Relative Strength Index at 45.6 slips below the neutral 50 mark and hints at fading bullish momentum rather than outright selling pressure. On the topside, initial resistance is observed at the 20-day Bollinger SMA middle band at 1.3900, followed by the 100-day SMA at 1.3915, with a more decisive barrier at the 20-day Bollinger upper band near 1.4045. On the downside, the next significant support is located at the 20-day Bollinger lower band around 1.3750, where buyers are likely to emerge if the current soft tone extends into a deeper corrective pullback.
