Canadian Dollar consolidates vs USD as rising oil prices and Fed hike bets clash

The USD/CAD pair is hovering around mid-1.3800s during the Asian session on Tuesday, though the lack of follow-through selling warrants caution before positioning for an extension of the previous day's retracement slide from an over two-week top.

A further escalation of tensions between the US and Iran acts as a tailwind for crude oil prices, underpinning the commodity-linked Loonie. Apart from this, a softer US Dollar (USD) turns out to be another factor exerting some pressure on the USD/CAD pair. That said, rising bets for a rate hike by the Federal Reserve (Fed) in September, along with geopolitical uncertainties, could limit deeper losses for the safe-haven Greenback.

Speaking at the annual symposium in Jackson Hole, Wyoming, Fed Chair Kevin Warsh acknowledged that inflation is running hot and hinted on Friday that interest rates could need to move higher if more progress isn’t made on easing price pressures. Traders were quick to react and are now pricing in around a 65% chance that the US central bank will raise borrowing costs at the upcoming September 15-16 policy meeting.

Meanwhile, the US forces on Sunday attacked two Iranian rocket launchers that were preparing to deploy sea mines in the Strait of Hormuz, prompting an Iranian counterattack on American air bases in Jordan. US President Donald Trump threatened more strikes on Iran after the first exchange of direct attacks in a month. This led to a further rise in oil prices, fueling inflation fears and bolstering hawkish Fed expectations.

The outlook, in turn, favors USD bulls, while a deepening US-Canada trade war could act as a headwind for the Canadian Dollar (CAD), backing the case for the emergence of some dip-buying around the USD/CAD pair. Traders now look to this week's key US macro data, scheduled at the start of a new month, starting with the ISM Manufacturing later today, though focus will remain on the US Nonfarm Payrolls (NFP) report on Friday.

USD/CAD daily chart

Technical Analysis

The USD/CAD pair’s failure ahead of the 100-day Simple Moving Average (SMA) at 1.3917 suggests that rallies remain capped, keeping focus on the downside. A sustained break above this barrier would be needed to ease the prevailing bearish pressure and open the way for a more constructive recovery phase. Until then, spot prices seem vulnerable to decline further, with traders likely to watch for fresh lows to define the next demand area.