Canadian Dollar holds near recent lows as soft Oil, Fed uncertainty lift USD/CAD

• USD/CAD trades around 1.3990 on Tuesday, remaining close to its recent highs despite little movement on the day.
• Ongoing progress toward a US-Iran agreement continues to weigh on Oil prices, pressuring the Canadian Dollar.
• Investors await the Fed’s monetary policy decision for clues on the future path of US interest rates.

USD/CAD trades around 1.3990 on Tuesday at the time of writing, little changed on the day as markets adopt a cautious stance ahead of the Federal Reserve’s (Fed) monetary policy decision.

The pair maintains a bullish bias, supported by the persistent weakness of the Canadian Dollar (CAD). Oil prices remain under pressure as investors continue to welcome diplomatic progress between Washington and Tehran. According to the Swiss Foreign Ministry, the memorandum of understanding between the United States (US) and Iran is scheduled to be signed on Friday in Bürgenstock, Switzerland. This development has fueled expectations of smoother global energy flows and contributed to the recent decline in Crude Oil prices.

Lower Oil prices remain a negative factor for the Canadian Dollar, as the currency is closely tied to Canada’s energy exports. This dynamic extends the pressure recently seen on the Loonie, while investors also monitor Canada’s economic outlook and the future policy direction of the Bank of Canada (BoC).

On the US side, the US Dollar (USD) remains broadly stable ahead of the Fed meeting. Investors widely expect policymakers to leave interest rates unchanged, but attention is focused on the Summary of Economic Projections and the updated dot plot. Market participants will look for signs of whether the recent rise in energy prices and higher inflation have encouraged policymakers to adopt a more hawkish stance regarding the future path of interest rates.

Meanwhile, the latest US economic data continue to point to signs of moderation in the labor market. The four-week average of the ADP Employment Change report showed that private companies added 25.5K jobs, down from the previous reading of 29K, suggesting a gradual slowdown in hiring activity.

In addition, the earlier surge in energy costs has already contributed to higher US inflation. The Consumer Price Index (CPI) rose to 4.2% YoY in May, its highest level since April 2023. However, improving relations between the United States and Iran have recently helped push Oil prices lower, which could ease some inflationary pressures over the medium term.

The combination of a resilient US Dollar ahead of the Fed meeting and a Canadian Dollar weighed down by lower Oil prices is therefore keeping USD/CAD near its recent highs, with investors now awaiting the Federal Reserve’s updated economic projections for guidance on the pair’s next directional move.