Canadian Dollar holds near recent lows as Oil slump, Fed outlook weigh

• USD/CAD trades around 1.4010 on Wednesday, up 0.10% on the day and near its recent highs.
• Declining Oil prices continue to weigh on the Canadian Dollar, which remains sensitive to developments in energy markets.
• Investors await the Fed’s policy decision and the first guidance from Kevin Warsh as Chair of the central bank.

USD/CAD trades around 1.4010 on Wednesday at the time of writing, gaining 0.10% on the day. The pair maintains a bullish tone as the Canadian Dollar (CAD) remains under pressure from falling Oil prices, while traders position ahead of the Federal Reserve’s (Fed) monetary policy decision.

Improving prospects for a peace agreement between the United States (US) and Iran have fuelled expectations of increased global Oil supply. Markets anticipate a resumption of Iranian Oil exports, which continues to pressure Crude prices. This dynamic weighs on the Canadian Dollar, as the currency is closely tied to Canada’s energy revenues, with the country being the largest Oil exporter to the United States.

At the same time, diplomatic progress between Washington and Tehran supports a more risk-friendly market environment, reducing some of the safe-haven demand for the US Dollar (USD). However, the negative impact of lower Oil prices on the Canadian Dollar allows USD/CAD to remain firm near the psychological 1.4000 level. The weakness in the Oil market remains a key driver for the pair, as highlighted in recent market commentary.

Investor attention now turns to the Fed, which is widely expected to leave its benchmark interest rate unchanged within the 3.5%-3.75% range. The event carries particular significance as it marks Kevin Warsh’s first meeting as Fed Chair.

Beyond the widely anticipated hold, markets will closely monitor the updated economic projections and Warsh’s comments for clues on the future policy path. According to analysts at MUFG, the Fed could adopt a more hawkish tone by removing its easing bias and reducing expectations for future rate cuts in its projections, a scenario that could provide additional support for the US Dollar.

However, the sharp decline in energy prices could also give Warsh room to downplay near-term inflation risks. Investors will therefore be looking to assess whether the central bank remains primarily focused on inflation concerns or whether recent developments in commodity markets are beginning to influence its outlook for the economy.