Canadian Dollar weakens amid falling oil prices, stronger US Dollar

• Canadian Dollar declines as oil prices drop on reports of US-Iran talks to reopen the Strait of Hormuz.
• Geopolitical standoffs persist as Iran demands an end to port blockades while the US maintains its firm stance.
• US Dollar strengthens as CME FedWatch data shows a 67.5% chance of an October rate hike.

USD/CAD extends its gains for the fifth consecutive day, trading around 1.4140 during Asian hours on Friday. The pair appreciates as the commodity-linked Canadian Dollar (CAD) faces downward pressure from falling crude oil prices.

Crude oil prices drop after reports that the United States (US) and Iran are considering a phased agreement to reopen the Strait of Hormuz and lift the US blockade on Iranian ports. Mediated by Qatari officials, these breakthrough discussions were reportedly initiated on the sidelines of the United Nations General Assembly.

However, both nations maintain firm positions. Iran refuses to enter any agreement or relinquish control over the Strait of Hormuz unless the US lifts its port blockade and reduces military pressure. On the other side, a White House official noted that while President Donald Trump remains open to negotiations, the US feels little pressure to concede due to its strong standing following the sanctions campaign.

Concurrently, the USD/CAD pair is gaining momentum as the US Dollar (USD) strengthens, driven by hawkish signals from Federal Reserve officials. Financial markets have responded accordingly: data from the CME FedWatch Tool indicates that the likelihood of an October benchmark rate hike has jumped to nearly 67.5%, a noticeable increase from 55.4% a week prior and just 11% a month ago.

Fed’s Paulson flags risk of further rate hikes as inflation stays stubborn

Fed’s Paulson delivered a distinctly hawkish message, with an FXS Speechtracker score of 8.1/10, notably stronger relative to the historical average of 7/10. Emphasizing that the US central bank may need to raise interest rates again, Paulson framed the September hike as moving policy into a more effective inflation-fighting stance, while stressing that underlying inflation remains “stubbornly high” and that the best that can be said is that it has not worsened. References to the AI buildout as a source of inflation pressures, alongside a resilient economy and stable labor market, reinforce a bias toward further tightening to restore inflation to 2%.

The FXS Fed Sentiment Index was unchanged, moving 0.00 points and holding at a high 148.18, firmly in hawkish territory according to the FXS Speechtracker framework. The static but elevated reading signals that Paulson’s remarks are consistent with an already entrenched hawkish stance at the Federal Reserve, rather than a fresh escalation in perceived policy aggression.

Technical Analysis:

In the daily chart, USD/CAD trades at 1.4140, extending its advance above both the nine-period Exponential Moving Averages (EMAs) at 1.4048 and the 50-period EMA at 1.3955, which together underpin a firm bullish near-term bias. The short-term EMA has crossed well above the longer one, reinforcing an upward trend structure, while the 14-day Relative Strength Index (RSI) at 72.64 sits in overbought territory, hinting that upside momentum is strong but increasingly stretched.

On the downside, initial support emerges at the nine-period EMA, with a deeper cushion at the 50-period EMA should a corrective pullback unfold. As long as USD/CAD holds above these moving average supports, the broader topside bias remains intact, although the elevated RSI warns that the pair could be vulnerable to bouts of profit-taking before fresh buying interest resumes.

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