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- USD/CAD slips as the commodity-linked Canadian Dollar gains on higher oil prices.
- Crude oil prices gain as Trump reinstated an Iranian blockade and imposed a 20% transit fee on other vessels securing the strait.
- The US Dollar could receive support as intensifying Middle East tensions could drive global investors into safe-haven assets.
USD/CAD continues its losing streak after remaining flat in the previous day, trading around 1.4150 during the Asian hours on Tuesday. The pair depreciates as the commodity-linked Canadian Dollar (CAD) receives support from higher oil prices. It is important to note that Canada is the largest crude exporter to the United States (US).
Crude oil prices rise due to mounting supply anxieties following a sharp escalation of geopolitical hostilities in the Middle East. US President Donald Trump has reinstated a naval blockade targeting Iranian vessels and customers transiting the Strait of Hormuz, while simultaneously announcing that all other commercial cargo passing through the strategic waterway will be subject to a 20% reimbursement fee.
President Trump asserted that the US must be financially compensated for its military efforts to secure the volatile chokepoint, pointing directly to regional nations that benefit from US protection, including Saudi Arabia, the United Arab Emirates, Qatar, Bahrain, and Kuwait.
The USD/CAD pair’s downside remains limited as a wave of geopolitical tensions in the Middle East fuels safe-haven demand, which could drive investors back into the US Dollar (USD). At the same time, climbing crude oil prices are complicating the outlook; while higher oil typically boosts the commodity-linked Canadian Dollar (CAD), it is also triggering renewed fears that energy-driven inflation will force the Federal Reserve (Fed) to tighten policy further. Market expectations have shifted rapidly in response, with the CME FedWatch Tool now showing a 51% probability of a Fed rate hike in September, compared to just a 23% chance that rates will stay on hold.
Market participants are temporarily pausing ahead of two massive macroeconomic catalysts scheduled for Tuesday. First up is the US June Consumer Price Index (CPI) report, where analysts anticipate a divergence between a 0.1% month-on-month decline in headline inflation and a sticky 0.3% increase in the core reading. Shortly after, Federal Reserve Chair Kevin Warsh will deliver highly anticipated congressional testimony, a session that traders will dissect word-by-word for hints on whether the central bank will validate the market’s growing hawkishness.
