Rising oil prices and hawkish BoC rate hike bets bolster Canadian Dollar

• Surging crude oil prices lend support to the commodity-linked Canadian Dollar, pushing USD/CAD lower.
• Despite continuing efforts to resolve the US-Iran conflict, officials reject reports suggesting a final peace agreement is close.
• An 85% probability of a Fed rate hold is priced into markets, with Chair Warsh retaining a neutral policy position.

Higher crude oil prices are strengthening the commodity-linked Canadian Dollar (CAD), leaving USD/CAD on course for a fifth consecutive daily decline. The pair trades near 1.4050 in Wednesday’s European session.

Conflicting reports on diplomatic progress between the United States and Iran shaped trading as energy markets rose. Negotiations are still under way, but sentiment came under pressure following senior-level diplomatic meetings in Tehran. Pakistan’s army chief, Field Marshal Asim Munir, held discussions with senior Iranian diplomatic and military leaders on bilateral relations and the state of negotiations with Washington. A diplomat participating in the talks said efforts to resolve the conflict were continuing, rejecting reports that a final agreement was imminent as premature.

BoC rate hike bets remain high as Canadian inflation pressures ease

Canadian headline inflation has edged up even as underlying price pressures have softened, according to Societe Generale’s Kenneth Broux, who draws attention to the gap between the latest figures and market pricing. In that context, he considers it “puzzling” that “money markets continue to price in better than 50% odds of a rate increase by the BoC at the end of the month,” while USD/CAD continues to edge towards key support levels within a clear downtrend.

Safe-haven demand is helping the US Dollar (USD) remain firm, potentially limiting downward pressure on the NZD/USD currency pair. Renewed worries about global inflation, fuelled by higher oil prices, are also underpinning the Greenback. The Federal Reserve’s policy outlook remains a focus for financial markets: the CME FedWatch Tool shows traders assigning an 85% probability to unchanged interest rates next week and an 88% probability to a December rate increase.

Technical analysis points to a bearish USD/CAD bias:

Trading at 1.4050 on the daily chart, USD/CAD remains below its key moving averages, maintaining a bearish near-term outlook even though the pair is relatively close to recent highs. Both the 50- and nine-day Exponential Moving Averages (EMAs) stand above the price, leaving rebounds vulnerable while these short- and medium-term trend measures remain overhead. At 41.7, the 14-day Relative Strength Index (RSI) is drifting below its midpoint. This suggests bullish momentum is fading after the overbought readings recorded earlier in October.

The 50-day EMA at 1.4075 provides the first resistance on the upside, followed by a more substantial obstacle at the nine-day EMA near 1.4138. A recovery towards that level could encounter renewed selling. As the supplied indicators offer no clear technical support levels, attention centres on whether USD/CAD can move back above the 50-day EMA and relieve downward pressure. Alternatively, the pullback could deepen while momentum remains subdued and the Fed Sentiment Index consolidates close to its recent lows.

Warsh highlights investment surge and AI while leaving policy options open

A score of 5.6/10 on the FXS Speechtracker, slightly below the historical average of 6.1/10, accompanied a cautiously constructive message from Fed Chair Warsh. Describing himself as "over-scarred from the global financial crisis" signals a preference for risk management and financial stability, despite his emphasis on structural growth and a surge in investment underpinned by "good policies." By declining to prejudge the October and December meetings and stressing uncertainty over AI’s near-term effect on employment, Warsh indicated a data-dependent approach, limiting any immediate hawkish implication for the Dollar.

With a movement of 0.00 points, the FXS Fed Sentiment Index held at an elevated 127.51. The reading confirms that the broader policy tone is still firmly hawkish, notwithstanding the slightly weaker FXS Speechtracker score. For currency markets, that high index reading, alongside Warsh’s cautious outlook shaped by the financial crisis, points to continued support for the Dollar. The speech nevertheless offered no fresh intensification of the hawkish message.

(The technical analysis of this story was written with the help of an AI tool. Know more.)