Canadian Dollar strengthens as elevated oil prices lend support

• Near 1.4025, USD/CAD continues to decline in early European trading on Thursday.
• A BoC rate increase next week is expected by economists.
• Prospects for progress in talks with the US appeared limited, Iran indicated.

With elevated crude oil prices supporting the commodity-linked Canadian Dollar (CAD) against the US Dollar (USD), USD/CAD slips to around 1.4025 in Thursday’s early European session, its lowest level since 21 September. Weekly US Initial Jobless Claims figures are scheduled for release later on Thursday, followed on Friday by the key Canadian Retail Sales and US Purchasing Managers Index (PMI) reports.

After roughly a year of leaving its key interest rate on hold, the Bank of Canada (BoC) could resume increases at next week’s policy meeting, according to some economists. Such a move would mark its first rate rise in more than three years.

According to Reuters, swap market pricing puts the probability of a 25 basis point (bps) increase in the Canadian central bank’s benchmark rate to 2.50% on 28 October at 80%.

Deepening tensions between the US and Iran, meanwhile, drove a jump in crude oil prices. The Financial Times reported that Iranian Foreign Minister Abbas Araqchi saw little reason to anticipate progress in negotiations with Washington and said Tehran was fully prepared to defend itself.

For his part, Iranian President Masoud Pezeshkian said Washington could not expect Tehran to enter dialogue while continuing to blockade and threaten it. As Canada is a major oil exporter, elevated crude prices are generally supportive of the Loonie.

USD/CAD faces pressure as IMF projections show a widening North American growth gap

A softer Canadian outlook stands in contrast to the latest IMF projections for the US, highlighting an increasing divergence in North American prospects, according to strategists at Societe Generale. The Fund now forecasts US growth of “2.5% this year (while remaining at 2.1% in 2027),” they note. In their assessment, “the North American growth gap is widening,” and while “the chart on the right shows relative Bloomberg consensus growth forecasts for 2027, … the IMF’s assessment (1.2% growth in Canada next year versus 2.1% in the US) is even less favourable for Canada.” Turning to the policy and market setting, Societe Generale observe that “the chart on the left shows the two-year rate differential plotted against USD/CAD,” highlighting how relative interest rate expectations influence the Canadian Dollar’s performance.

Warsh leaves Fed options open as investment surge and AI risks shape outlook

At 5.6/10, Fed Chair Warsh’s FXS Speechtracker score was slightly below the historical average of 6.1/10, reflecting a moderately cautious delivery and a little less conviction than the established baseline. His acknowledgement of being “over-scarred” by the Global Financial Crisis sat alongside an emphasis on structural growth, surging investment and forthcoming “crystalizing” meetings. Together, these points indicate an awareness of risk that balances optimism about investment and AI against downside and financial stability concerns. By declining to commit in advance to October and December decisions and stressing uncertainty over AI’s near-term effects on employment, Warsh maintained a data-dependent stance, limiting any clearly hawkish signal for the Dollar.

Despite that slightly softer FXS Speechtracker score, the broader policy message remained firmly hawkish: the FXS Fed Sentiment Index recorded a rise of 0.00 points, leaving it unchanged at an elevated 127.51. Its steady reading above 100 suggests markets still price in a Fed focused on price stability and alert to upside risks from investment and AI, even while its near-term guidance remains deliberately non-committal.

Technical Analysis: USD/CAD retains bearish bias below the 100-day SMA

The lower Bollinger band and 100-day moving average form the immediate resistance zone at 1.4040-1.4045. Sustained buying beyond that area would relieve near-term downward pressure, paving the way for a move towards the Bollinger midline at around 1.4190, followed by the upper band near 1.4330. 

Initial key support lies at the psychological 1.4000 mark, ahead of the 31 August high at 1.3912. Below that, attention would turn to the 8 September low of 1.3760 as the next support level. 

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