USD/CAD trimmed some of its recent gains on Wednesday, pulling back from highs just under 1.3700. Despite the retracement, the pair retains most of the upside it captured on Tuesday amid increased risk aversion and geopolitical uncertainty.
Dollar Surge Fueled by Middle East Tensions
The US dollar surged about 0.8% on Tuesday, boosted by President Trump’s aggressive stance towards Iran, including calls for “unconditional surrender” and threats to escalate military involvement. Trump also hinted at the possibility of targeting Iran’s Supreme Leader, Ali Khamenei, further intensifying market jitters.
Crude Oil Rally Supports Canadian Dollar
Rising geopolitical risks are also driving crude prices higher. West Texas Intermediate (WTI) crude has surged sharply over the past two weeks, reaching its highest levels since late January. As one of the world’s largest oil exporters, Canada’s currency often benefits from stronger oil prices, providing support to the CAD amid broader market volatility.
Federal Reserve Meeting in Focus
Investor attention now turns to the Federal Reserve’s monetary policy announcement due later today. The Fed is expected to keep interest rates steady, but market participants will closely watch Chair Jerome Powell’s remarks and updated economic forecasts for signals about future policy moves.
Powell has recently expressed caution about easing monetary policy further, citing inflation risks linked to tariffs. However, the Fed will need to weigh this against weak macroeconomic data that has emerged recently.
Market Expectations and Possible Outcomes
Dovish tone: Any hint of potential rate cuts, possibly in September, could weaken the US dollar further and support the CAD.
Hawkish or neutral tone: Powell’s reluctance to commit to easing might bolster the dollar and keep USD/CAD elevated.
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