The USD/CAD pair continued its decline after retreating from an eight-month high of 1.3865 on Monday, trading around 1.3840 during the Asian session on Wednesday. The rise in crude oil prices is bolstering the commodity-linked Canadian Dollar (CAD) against the US Dollar (USD), with Canada being the largest crude exporter to the United States.
West Texas Intermediate (WTI) crude oil is trading around $75.40 per barrel at press time, rebounding from an eight-week low of $74.24 recorded on Tuesday. This recovery is driven by escalating geopolitical tensions in the Middle East.
The Israeli government announced it had killed Hezbollah’s most senior commander in an airstrike on Beirut on Tuesday, a response to Saturday’s cross-border rocket attack on Israel. This escalation occurs despite diplomatic efforts by US and UN officials to prevent a broader conflict in the Middle East, according to Reuters.
Scotiabank’s Chief FX Strategist, Shaun Osborne, noted that the CAD is grappling with significant negative sentiment. “The latest CFTC data showed a substantial buildup of bearish CAD positioning. While positioning appears excessive, the weak sentiment is largely a reflection of the Bank of Canada’s easing bias.”
On the data front, Canadian Gross Domestic Product (MoM) data for May is set to be released on Wednesday. For the USD, the Federal Reserve is expected to keep rates unchanged in its upcoming meeting later in the North American session.
However, there is growing anticipation of a rate cut in September, exerting downward pressure on the US Dollar. Signs of cooling inflation and easing labor market conditions in the United States are fueling expectations of multiple rate cuts by the Fed this year, potentially totaling three cuts. The CME FedWatch Tool indicates a 100% probability of at least a quarter percentage point cut in September.
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