Canadian Dollar falls to multi‑month low as Fed hike bets rise, Oil weighs

USD/CAD trades around 1.4190 on Tuesday at the time of writing, up 0.25% on the day and extending a four-day winning streak to its highest level since April 7. The pair is benefiting from renewed demand for the US Dollar (USD) as investors strengthen their expectations for additional monetary tightening by the Federal Reserve (Fed).

The US Dollar Index (DXY), which tracks the Greenback against a basket of six major currencies, rises toward 101.35, its highest level in more than a year. According to the CME FedWatch tool, markets now see nearly an 86% chance of at least one Fed rate hike this year.

These expectations have been supported by the resilience of the US economy and persistent underlying inflationary pressures. Preliminary S&P Global data showed that private-sector activity remained solid in June. The Composite Purchasing Managers Index  (PMI) came in at 52.2, up from 51.5 previously, while the Manufacturing PMI accelerated to 55.7 and the Services PMI improved to 51.3, with both readings beating market expectations.

In Canada, investors continue to assess a more challenging economic backdrop. Data released by Statistics Canada on Monday showed that the headline Consumer Price Index (CPI) accelerated to 3.2% YoY in May, up from 2.8% previously and above forecasts of 3%. Despite the upside surprise, concerns about slowing economic growth have fueled fears of a stagflationary environment.

Last week, Bank of Canada (BoC) Governor Tiff Macklem acknowledged that the Canadian economy remains weak, although it is not in recession. On Tuesday, he also warned that growing global imbalances could increase financial stability risks. According to Macklem, the continued attractiveness of US assets has helped sustain these imbalances and direct capital flows toward the United States (US).

Scotiabank analysts argue that the Canadian Dollar (CAD) retains a bearish bias despite the rebound triggered by the inflation data. The bank notes that a meaningful reversal in US-Canada yield differentials appears unlikely in the near term, which should continue to favor USD/CAD. Scotiabank also suggests that a sustained move above the 1.41 area could pave the way for further gains toward 1.43 and potentially 1.45.

The Canadian Dollar is also being pressured by weaker Oil prices, a key driver of Canada’s economy. ING analysts note that Crude prices declined after the US granted a temporary waiver allowing Iranian Oil exports to continue, while markets increasingly expect a gradual normalization of energy flows through the Strait of Hormuz.

Investors are now turning their attention to the upcoming US Personal Consumption Expenditures (PCE) Price Index and the final estimate of first-quarter Gross Domestic Product (GDP). These releases could provide fresh clues about the future path of monetary policy and determine whether the US Dollar can extend its recent outperformance against the Canadian Dollar.