Why is the Canadian Dollar falling as growing US-Iran deal bets push oil prices lower?

• USD/CAD advances as weaker oil prices weigh on the commodity-linked Canadian Dollar (CAD).
• The US Dollar strengthens even as speculation builds over a possible US-Iran agreement.
• While keeping the US "locked and loaded", President Trump suggested that additional strikes on Iran might not be needed.

USD/CAD edges up towards 1.4120 in Tuesday’s Asian session, supported by pressure on the commodity-linked Canadian Dollar (CAD) from softer oil prices. The modest advance follows a small decline in the previous session.

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 required, while keeping the US "locked and loaded." Pointing to progress towards ending the war, Trump said Iran is "militarily, effectively over" and that the prevailing status quo is being maintained largely at neighbouring nations’ request.

Strength in the US Dollar (USD) provides another source of support for USD/CAD, even as speculation intensifies over a possible agreement between Washington and Tehran. The forthcoming United States (US) Consumer Price Index (CPI) release remains in focus for traders.

Expectations of a Federal Reserve interest rate increase at the December meeting have firmed following last week’s Nonfarm Payrolls report. The CME FedWatch Tool places the probability at 84%, compared with 76% a day earlier. Meanwhile, US headline CPI is expected to climb to 3.9% year-on-year from October’s 3.7%, with core CPI projected to edge up to 2.8% from 2.6%.

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

Can the Fed’s hawkish bias keep the Dollar supported?

Although the Dollar has surrendered part of its recent rise, 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 assessment of the underlying support 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.”