Canadian Dollar gains on surging Oil prices, USD/CAD eyes second weekly loss

• USD/CAD remains under pressure, heading for a second consecutive weekly loss.
• Surging crude Oil prices boost the commodity-linked Canadian Dollar.
• Hawkish Federal Reserve expectations help limit the US Dollar's downside.

USD/CAD trades under pressure on Friday as the Canadian Dollar (CAD) benefits from higher Oil prices, offsetting the US Dollar’s (USD) recovery. At the time of writing, the pair trades around 1.4022, near a one-month low.

The pair is heading for a second consecutive weekly loss, with Oil prices up nearly 12% this week as intensifying fighting between the United States (US) and Iran disrupts energy shipments through the Strait of Hormuz. As Canada is a major crude Oil exporter, higher prices tend to support the Loonie.

Higher energy prices are also reviving inflation concerns and complicating the monetary policy outlook for major central banks. Earlier this week, the Bank of Canada (BoC) left its policy rate unchanged at 2.25%, raised its 2026 inflation projection to 2.5% from 2.3%, and expects inflation to return to its 2% target by early 2027.

However, the BoC adopted a more balanced tone and removed the two-way policy guidance introduced in April. That guidance had suggested that new US trade restrictions on Canada could warrant interest rate cuts, while persistently high energy prices could require “consecutive increases in the policy rate.”

Across the border, softer-than-expected US inflation data released earlier this week initially pushed the US Dollar lower as traders trimmed bets on a near-term Federal Reserve (Fed) interest rate hike.

However, the Greenback's pullback proved short-lived as higher Oil prices fueled concerns that inflation could reaccelerate, supporting expectations of a Fed rate hike later this year.

Escalating geopolitical tensions and hawkish Fed expectations should keep the US Dollar well supported. The US Dollar Index (DXY), which tracks the Greenback's value against a basket of six major currencies, trades around 100.83 after hitting a more than three-week low of 100.35 on Wednesday.