Canadian Dollar extends pullback from two-month high as oil-driven Fed hike bets lift USD

The Canadian Dollar (CAD) experienced a decline from its two-month peak as expectations of Federal Reserve (Fed) interest rate hikes, driven by oil prices, strengthened the US Dollar (USD). On Thursday, the USD/CAD pair reached the upper end of its weekly range, trading above 1.3950. This upward movement was fueled by a firm US Dollar (USD), with the USD Index (DXY) continuing its weekly surge for the fourth consecutive day, reaching a two-week high.

Inflation risks resulting from volatile oil prices revived hawkish Fed expectations, with traders pricing in an 80% chance of a rate increase by year-end, according to the CME Group's FedWatch Tool. Geopolitical tensions, such as the US-Iran standoff in the Strait of Hormuz and attacks by Iran-backed Houthis on vessels in the Red Sea and Bab el-Mandeb Strait, also contributed to the safe-haven demand for the USD.

Higher oil prices offered some support to the commodity-linked Canadian Dollar (CAD), suggesting caution before making aggressive bullish bets on the USD/CAD pair. Traders will closely monitor Thursday's US economic data, including the Producer Price Index (PPI) and Weekly Initial Jobless Claims, as well as comments from influential Federal Open Market Committee (FOMC) members.

The USD/CAD pair remained resilient below the 100-day Simple Moving Average (SMA) at 1.3920, although negative momentum indicators indicated a bearish trend. Technical analysis using AI suggested that a close below the 100-day SMA would confirm the downtrend, while holding above it could support further gains for the USD/CAD pair.