Canadian Dollar finds support in firmer Oil as traders look to inflation data

• USD/CAD pulls back from recent highs as the Canadian Dollar benefits from firmer Oil prices.
• Fed rate hike bets keep the US Dollar near a 19-month high, cushioning the pair's decline.
• Traders await Canadian CPI data for clues on the BoC's December rate decision.

USD/CAD pauses a three-day winning streak on Friday as a rebound in Oil prices helps the Canadian Dollar (CAD) outperform its major peers. The pair’s downside remains cushioned by a broadly stronger US Dollar (USD), supported by an increasingly hawkish Federal Reserve (Fed) outlook.

At the time of writing, USD/CAD trades around 1.4248, near a one-month high, and remains on track for a second straight weekly gain. The US Dollar Index (DXY), which tracks the Greenback against six major currencies, trades near 103.33, its highest level in 19 months.

Canada is a major crude exporter, making the Canadian Dollar sensitive to Oil price swings. Crude prices have recovered from recent lows after US President Donald Trump said on Thursday that Washington did not need a deal with Iran to end the war.

Higher energy prices threaten to keep inflation elevated across major economies. The Bank of Canada (BoC) raised its policy rate by 25 basis points (bps) to 2.50% at its October meeting. The Governing Council said the increase was needed “to reduce the risk that continuing high energy prices spread broadly to the prices of other goods and services.” Traders now await Canadian Consumer Price Index (CPI) data on Monday for fresh clues on whether the BoC will raise rates again in December.

Economists at RBC Economics expect the BoC to continue tightening policy, noting that the central bank "is expected to hike three more times." RBC forecasts "another 25-basis-point increase in December and two additional hikes by mid-2027, bringing the overnight rate to 3.25%, provided the economy continues to improve."

On the US side, Producer Price Index (PPI) data released earlier in the day drew little market reaction. Headline PPI rose 0.3% MoM in October, below the 0.4% forecast and down from 1.4% in September. Annual producer inflation picked up to 6.5% from 6.3%, just below the 6.6% forecast. Core PPI rose 0.3% MoM and 5.0% YoY, both in line with expectations.

According to the CME FedWatch Tool, traders fully price in a 25 bps hike in December, with a 10% chance of a larger 50 bps move. Traders also expect another hike in January.

Chicago Fed President Austan Goolsbee said on Friday that inflation would determine the path of rates and that the Fed still “has work to do.” Earlier this week, Dallas Fed President Lorie Logan called for “at least two more 25-basis-point rate increases.”