Canadian Dollar remains near two-month highs against US Dollar as Oil prices rise

• USD/CAD trades around 1.3935 on Tuesday, remaining close to its lowest level in two months.
• Rising Oil prices support the Canadian Dollar as Middle East tensions fuel concerns about global supply.
• Inflation risks underpin the US Dollar ahead of key US inflation data.

USD/CAD trades around 1.3935 on Tuesday at the time of writing, virtually unchanged on the day with a modest 0.03% decline. The pair remains close to its lowest level in two months as the Canadian Dollar (CAD) benefits from higher Oil prices, while the resilience of the US Dollar (USD) limits the downside.

Crude Oil prices remain supported by concerns over supply in the Middle East. The standoff between the United States (US) and Iran is dampening hopes for a swift reopening of the Strait of Hormuz, while shipping traffic through the Bab el-Mandeb Strait remains disrupted. These tensions are fueling concerns about global supply and supporting Oil prices, a generally positive factor for the Canadian Dollar given the significant role of energy in Canada's exports.

Geopolitical tensions remain elevated after Iran ruled out the prospect of further negotiations with US President Donald Trump. According to reports citing Iranian media, Tehran intends to wait until Trump's term ends on January 20, 2029, before considering a return to the negotiating table. This stance further reduces the prospects of a quick resolution to the disruptions affecting key shipping routes in the region.

The Canadian Dollar also finds some support from Canadian employment data released on Friday. The combination of a stronger labor market and rising Oil prices allows the Loonie to retain the upper hand against the Greenback and keeps USD/CAD under pressure near its recent lows.

The pair's downside remains limited, however, by the resilience of the US Dollar. Despite Friday's disappointing Nonfarm Payrolls (NFP) report, investors continue to price in the possibility that the Federal Reserve (Fed) could raise interest rates at least once by the end of the year. Elevated volatility in Oil prices is fueling concerns about renewed inflationary pressures that could encourage the US central bank to maintain a more restrictive policy stance.

At the same time, geopolitical uncertainty is supporting safe-haven demand for the Greenback and preventing USD/CAD from extending its decline for now.

Investors' attention now turns to upcoming US inflation data. The Consumer Price Index (CPI) is due on Wednesday, followed by the Producer Price Index (PPI) on Thursday. These releases should provide fresh clues about the Fed's monetary policy outlook and could determine the next directional move for the US Dollar and USD/CAD. Developments in the Middle East and their impact on Oil prices are also likely to remain at the center of market attention.

USD/CAD technical analysis

In the one-hour chart, USD/CAD trades at 1.3934, keeping a bearish near-term tone as it holds beneath the 100-period simple moving average (SMA) at 1.3992 and the 200-period SMA at 1.4015. A descending trend-line resistance stemming from 1.3964 and tracking near 1.3961 continues to cap intraday rebounds, while the Relative Strength Index (RSI) at about 43 stays in bearish-neutral territory, suggesting downside pressure is present but not overstretched.

On the topside, initial resistance aligns with the descending trend-line near 1.3961, ahead of the horizontal barrier at 1.3990 and the clustered 100- and 200-period SMAs at 1.3992 and 1.4015. On the downside, immediate support is seen at the horizontal level around 1.3926, where a break would open the way for further weakness, while holding above it would keep USD/CAD in a consolidative bearish bias beneath the overhead moving averages.

(The technical analysis of this story was written with the help of an AI tool. Know more.)