Canadian Dollar declines amid hawkish Fed outlook, US–Iran deal hopes

The Canadian Dollar experienced a decline on Friday due to hawkish remarks from the Federal Reserve (Fed) regarding potential interest rate hikes. This sentiment provided support to the US Dollar (USD) against the Canadian Dollar (CAD). New York Fed President John Williams and Cleveland Fed President Beth Hammack were set to speak later in the day.

Philadelphia Fed President Anna Paulson had previously stated that further tightening might be necessary if the economy continued its expected trajectory. John Williams also indicated that tighter monetary policy was on the horizon. These hawkish comments stemmed from the Fed's decision to raise its benchmark interest rate by 0.25% a week earlier.

Market expectations now suggest a 67.5% probability of an October rate hike, up from 55.4% a week before and 11% a month prior, as indicated by the CME FedWatch tool. Oil prices experienced a slight dip on Friday as markets deliberated on the implications of a potential US-Iran truce amidst the bombing of Saudi Arabia by Houthi rebels.

Iranian President Masoud Pezeshkian expressed a desire for Washington to return to the June ceasefire memorandum before the November midterm elections. Canada, being a significant oil exporter, is likely to see negative effects from lower crude oil prices, which generally put downward pressure on the CAD. Scotiabank analysts noted that the Canadian Dollar remained relatively stable on the session, balancing a risk-off sentiment in stocks against a bounce in crude oil.

They highlighted ongoing Gulf-area tensions, despite US claims that Iran sought a deal, with reports indicating that an Iranian official threatened to escalate the conflict to the Indian Ocean if attacked again. Scotiabank also emphasized that wide US/Canada front-end spreads, currently near 150 basis points, remain a major headwind for the CAD.

They pointed to upcoming Canadian retail sales data, scheduled for release at 8:30 ET, as a potential catalyst for USD/CAD trading. Fed President Paulson delivered a notably hawkish message, with an FXS Speechtracker score of 8.1/10, signaling a strong stance against inflation. This emphasis on potential further rate hikes, the improvement in the policy posture from the September hike, and persistent high inflation despite economic resilience all contributed to the hawkish tone.

The FXS Fed Sentiment Index remained unchanged at 148.18, firmly indicating a hawkish perspective. The daily chart for USD/CAD showed a bullish near-term bias, with the pair above the 100-day simple moving average and the lower band of the Bollinger Bands, suggesting that the broader uptrend was intact. However, the 14-day Relative Strength Index at 72.8 indicated overbought conditions, signaling that the upward momentum may be stretched as the price approached the upper Bollinger band.

Immediate resistance was identified at the Bollinger middle band at 1.3930 in a corrective scenario, while the more significant barrier was the upper Bollinger band at 1.4160, where buying pressure might falter. On the downside, initial support was seen at the 100-day SMA at 1.3965, followed by a deeper structural support level at the Bollinger lower band near 1.3700, where any prolonged decline would likely find buying interest.