Canadian Dollar falls as growing expectations of a US-Iran deal weigh on oil prices

• Lower oil prices weigh on the commodity-linked Canadian Dollar (CAD), helping USD/CAD advance.
• Despite mounting speculation about a possible US-Iran agreement, the US Dollar strengthens.
• While keeping the US "locked and loaded.", President Trump suggested that additional strikes on Iran might not be needed.

At around 1.4120 in Tuesday’s Asian session, USD/CAD edges upwards following a modest decline the day before. Softer oil prices put pressure on the commodity-linked Canadian Dollar (CAD), lending support to the pair.

Optimism surrounding diplomatic efforts to resolve the Middle East conflict has pushed crude oil prices to their lowest levels since August. Despite continuing attacks in the region, US President Donald Trump suggested that additional strikes on Iran might not be needed, while keeping the US "locked and loaded." Pointing to progress towards ending the war, Trump said Iran is "militarily, effectively over" and indicated that the current status quo is being preserved largely at neighbouring nations’ request.

A stronger US Dollar (USD) is also lifting USD/CAD, even as speculation builds over a possible agreement between Washington and Tehran. The forthcoming United States (US) Consumer Price Index (CPI) release remains the focus for traders.

Forecasts point to US headline CPI rising to 3.9% year-on-year from 3.7% in October, alongside an increase in core CPI to 2.8% from 2.6%. Expectations of a Federal Reserve interest rate increase at its December meeting have firmed since last week’s Nonfarm Payrolls report. The CME FedWatch Tool now assigns an 84% probability to a hike, compared with 76% a day earlier.

Inflation risks within the central bank’s mandate were emphasised by Richmond Fed President Thomas Barkin. Meanwhile, Chicago Fed President Austan Goolsbee noted that faster services inflation challenges the view that tariffs alone account for high prices.

Hawkish Fed bias continues to underpin the Dollar

Although the Dollar has given back some of its recent gains, Brown Brothers Harriman strategists maintain that the wider backdrop remains favourable for the currency. They note that “USD pared back some of Friday’s strong October non-farm payrolls gains.” Their broader assessment is that “robust US economic activity, favorable labor market conditions and sticky underlying inflation back the Fed’s hawkish bias, keeping rate differentials supportive of USD.”