USD/CAD remains subdued as safe-haven demand for the US Dollar eases, influenced by ongoing diplomatic efforts in the Middle East. The Canadian Dollar may encounter challenges as declining oil prices exert significant pressure on the commodity-linked currency. Strong economic indicators from the United States, coupled with elevated expectations for Federal Reserve interest rate increases, could bolster the value of the US Dollar. The USD/CAD pair has shown an upward movement following its initial bearish gap at the opening. It continues to operate within negative territory, currently trading near 1.3970 during the Asian session on Monday.
The pair holds losses as the US Dollar struggles due to easing safe-haven demand, driven by ongoing diplomatic efforts to end the Middle East conflict despite lingering fears of renewed US military action against Iran. Qatari and Iranian officials have engaged in discussions for a third consecutive day, aiming to reach an agreement to conclude the war prior to the US midterm elections. However, downside pressure on the USD/CAD pair remains contained as the commodity-linked Canadian Dollar may encounter challenges from declining oil prices. Crude prices experienced a decline subsequent to OPEC+’s decision to uphold consistent oil production targets for December, thereby maintaining production at the levels established in September. Under this arrangement, Saudi Arabia’s allocation is established at 10.478 million barrels per day, with Russia following at 9.949 million and Iraq at 4.431 million.
Meanwhile, the US Dollar may recover as expectations for a Federal Reserve rate hike increase. Traders are currently assigning approximately a 75% probability to a rate increase in December, a sentiment reinforced by recent macroeconomic data from the US that indicates both economic resilience and ongoing inflationary pressures. Moreover, market participants are focused on key upcoming events, including the US Nonfarm Payrolls report and ISM manufacturing and services data. Remarks from several Federal Reserve officials scheduled throughout the week are anticipated to provide additional insights into the central bank’s trajectory regarding monetary policy.
Strategists at Brown Brothers Harriman highlight that the latest US September PCE report “confirms that progress on inflation has stalled.” They note that, in line with consensus, “headline PCE rose 0.5% m/m vs. +0.3% in August to be up 3.6% y/y vs. 3.4% in August,” while “core PCE was up 0.3% m/m vs. 0.3% in August to be up 3.1% y/y vs. 3.0% in August.” This combination of firmer headline and core readings underpins their view that the disinflation trend has lost momentum, reinforcing the backdrop of stalled inflation progress that is increasingly central to the current Dollar and rates narrative.
