USD/CAD appreciates as declining oil prices exert pressure on the commodity-linked Canadian Dollar. Oil prices could potentially recover as Iran suspends indirect talks with the United States. The US Dollar strengthens as escalating tensions in the Middle East heighten inflation concerns and lead to expectations of sustained high interest rates from the Federal Reserve. USD/CAD continues to build on its momentum for the third consecutive day, currently trading near 1.3840 during the Asian session on Tuesday. The pair appreciates as the commodity-linked Canadian Dollar faces challenges due to declining oil prices.
However, crude oil prices may regain their ground as the Tasnim news agency indicated that Tehran has halted indirect negotiations with the United States. According to the report, Iran and its “Resistance Front” allies, which include Yemen, Lebanon, and Iraq, have formulated a strategy aimed at entirely obstructing the vital Strait of Hormuz and initiating further fronts, such as the Bab el-Mandeb Strait, as a method of retaliating against Israel and its backers. Renewed tensions in the Middle East persist in driving global inflation worries and heightening anticipations of sustained Federal Reserve policy rates.
This macroeconomic backdrop is providing strong support to the US Dollar, subsequently keeping the USD/CAD pair higher. Reflecting these persistent inflationary pressures, financial markets are now pricing in a potential Federal Reserve rate hike before the year ends, with the CME FedWatch tool currently indicating a 39% probability of a quarter-point increase in December. However, US President Donald Trump presented a more positive diplomatic perspective, stating that an agreement with Iran to prolong the ceasefire and reopen the vital Strait of Hormuz could be achieved “over the next week.”
Trump’s remarks came after his direct involvement to stop an unexpected military escalation between Israeli forces and Hezbollah in Lebanon. While recognising that multiple outstanding issues persist, Trump conveyed assurance in the current negotiations, highlighting that he had promptly addressed a diplomatic “glitch” that had previously posed a risk to advancing progress.