Canadian Dollar holds firm against US Dollar ahead of US CPI

The Canadian Dollar held steady against the US Dollar on Tuesday as the US Dollar remained strong ahead of the US Consumer Price Index (CPI) data release on Wednesday. USD/CAD was hovering around 1.3930, near a two-month low. Oil prices were unpredictable due to the potential reopening of the Strait of Hormuz following a proposed agreement between Iran and Oman.

Qatar's Foreign Ministry reported that negotiations between the two nations had reached a critical stage. As a major crude exporter, Canada's economy is highly sensitive to oil prices. WTI traded at $81.50, down from its intraday high of $83.57 but still up more than 5% for the week. Traders were eagerly anticipating Wednesday's US CPI data to clarify the Federal Reserve's interest rate path, with the CME FedWatch tool indicating a 50% chance of a rate hike at the September meeting.

The Canadian economic calendar was light, leaving the Canadian Dollar's movements largely dependent on oil price fluctuations and global market developments. TD Securities forecasted that the Bank of Canada would maintain its rate at 2.25% through 2026 before returning to a neutral level of 2.75% the following year, with rate hikes of 25 basis points expected in January and March 2027.

TD Securities believed the Bank of Canada would exercise caution due to the significant shock to the inflation outlook caused by the oil price surge from the US-Iran conflict, with headline CPI nearing the top of its 1-3% target range.