Are rising oil prices and hawkish BoC rate hike bets fuelling the Canadian Dollar’s momentum?

• USD/CAD retreats as a surge in crude oil prices strengthens the commodity-linked Canadian Dollar.
• An imminent final peace agreement remains unlikely, according to officials, even as efforts to resolve the US-Iran conflict proceed.
• A Fed rate pause carries an 85% market-implied probability, with Chair Warsh retaining a neutral policy position.

Support for the commodity-linked Canadian Dollar (CAD) from higher crude oil prices is keeping USD/CAD under pressure. The pair is extending its decline into a fifth consecutive day, hovering near 1.4050 in Wednesday’s European session.

Mixed signals on diplomatic progress between the United States and Iran shaped trading as energy markets moved higher. Although negotiations are continuing, sentiment came under pressure after high-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 progress of talks with Washington. According to a diplomat participating in the negotiations, efforts to resolve the conflict remain under way, but reports suggesting a final agreement was imminent were premature.

Why do BoC hike bets remain elevated as Canada’s inflation pressures ease?

Market pricing appears at odds with the latest inflation figures, according to Societe Generale’s Kenneth Broux: Canadian headline inflation has edged up, but underlying price pressures have moderated. He therefore 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 trend clearly lower and edges towards important support levels.

At the same time, safe-haven buying is helping the US Dollar (USD) remain firm, which could limit downward pressure on the NZD/USD currency pair. Renewed worries about global inflation, fuelled by higher oil prices, are underpinning the Greenback. The Federal Reserve’s monetary policy outlook remains a key focus for financial markets. The CME FedWatch Tool shows traders assigning an 85% probability to unchanged Fed interest rates next week and an 88% probability to a rate increase in December.

Technical Analysis: Can USD/CAD regain its key moving averages?

Trading at 1.4050 on the daily chart, USD/CAD remains below its key moving averages. This leaves the near-term outlook bearish, even though the pair is still relatively close to recent highs. Both the 50- and nine-day Exponential Moving Averages (EMAs) lie above the price, leaving recovery attempts exposed as short- and medium-term trend indicators continue to act as overhead barriers. At 41.7, the 14-day Relative Strength Index (RSI) is drifting below its midpoint, signalling fading bullish momentum following the overbought readings recorded earlier in October.

The first upside hurdle is the 50-day EMA at 1.4075, followed by a more substantial barrier at the nine-day EMA near 1.4138. A recovery towards that level could attract renewed selling. The indicators provided do not identify clear technical support levels. Attention therefore centres on whether USD/CAD can move back above the 50-day EMA and relieve downward pressure, or whether its retreat will continue with momentum subdued and the Fed Sentiment Index consolidating close to recent lows.

Does Warsh’s investment and AI focus signal a policy shift?

A cautiously constructive assessment from Fed Chair Warsh produced an FXS Speechtracker score of 5.6/10, marginally below the historical average of 6.1/10. By acknowledging that he is "over-scarred from the global financial crisis", Warsh signalled an inclination towards risk management and financial stability, while also pointing to structural growth and a surge in investment supported by "good policies." He declined to prejudge the October and December meetings and stressed the uncertainty surrounding AI’s near-term effect on employment. Together, these remarks suggest a data-dependent approach, limiting any immediate hawkish signal for the Dollar.

Despite the slightly softer FXS Speechtracker reading, the broader policy tone remains firmly hawkish: the FXS Fed Sentiment Index recorded a 0.00-point change and stayed at an elevated 127.51. For currency markets, that high index reading, alongside Warsh’s cautious perspective shaped by the financial crisis, points to continued backing for the Dollar. The speech, however, offered no fresh intensification of hawkishness.

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