Canadian Dollar steadies as weak US Dollar offsets lower oil prices
- Weak US Dollar offsets the impact of lower oil prices, keeping CAD exchange rates relatively stable.
- July US CPI inflation fell to 3.4%, reducing chances of an aggressive Fed rate hike.
- Canadian Dollar weakens as OPEC and IEA slash 2026 global oil demand forecasts due to Middle East conflict.
USD/CAD remains steady after registering minor gains in the previous day, trading around 1.3940 during the Asian hours on Thursday. The currency pair moves within a narrow range as a weaker US Dollar (USD) balances out the impact of falling oil prices on the commodity-linked Canadian Dollar (CAD).
The Greenback continues to face headwinds following the release of July's Consumer Price Index (CPI) report, which showed moderating inflation across a wide range of goods and services and significantly cooled expectations for an aggressive Federal Reserve interest rate hike in September.
According to data from the Bureau of Labor Statistics, headline CPI rose 3.4% year-over-year in July, down from 3.5% in the previous month. Similarly, core CPI, which strips out volatile food and energy prices, rose 2.5% year-over-year compared to 2.6% in June. Both figures landed right in line with market forecasts.
Following the inflation report, market expectations for future Federal Reserve policy shifts have recalibrated. According to the CME FedWatch tool, interest-rate swaps are now pricing in roughly a 40.1% chance of a rate hike in September. Odds for an October increase dropped to around 60% from 75% the prior day, with the next potential rate hike not fully priced in until December.
US inflation in line with expectations as energy and food costs ease
According to TD Securities, July US consumer price inflation came in broadly as expected, with the headline index rising “0.1% m/m (0.074% before rounding; TD: 0.15%, consensus: 0.1%).” Strategists note that the modest increase was “partly explained by still retreating energy prices (gasoline -3% m/m) and slowing food inflation,” underscoring how softer input costs helped keep overall price pressures contained over the month.
Meanwhile, the Canadian Dollar is coming under pressure as oil prices decline following downward revisions to global demand forecasts for 2026, driven by disruptions stemming from the US-Israeli war on Iran. In its monthly oil market report on Wednesday, OPEC reduced its 2026 world oil demand growth projection to 580,000 barrels per day. Meanwhile, the International Energy Agency further downgraded its outlook, forecasting a 1.6 million bpd contraction in consumption this year—a notable drop from its previous estimate of 1 million bpd.
President Donald Trump stated that the US has "total control" over the strategic waterway amid heightened rhetoric between Washington and Tehran, while diplomatic talks remain stalled. At the same time, the Trump administration is pushing to ramp up economic pressure on Iran as military actions have yet to bring the regime into compliance. Planned measures include broadening economic sanctions and implementing a naval blockade to restrict Iranian oil exports.
Euro FAQs
The Euro is the currency for the 20 European Union countries that belong to the Eurozone. It is the second most heavily traded currency in the world behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion a day. EUR/USD is the most heavily traded currency pair in the world, accounting for an estimated 30% off all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy. The ECB’s primary mandate is to maintain price stability, which means either controlling inflation or stimulating growth. Its primary tool is the raising or lowering of interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.
Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric for the Euro. If inflation rises more than expected, especially if above the ECB’s 2% target, it obliges the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to its counterparts will usually benefit the Euro, as it makes the region more attractive as a place for global investors to park their money.
Data releases gauge the health of the economy and can impact on the Euro. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the single currency. A strong economy is good for the Euro. Not only does it attract more foreign investment but it may encourage the ECB to put up interest rates, which will directly strengthen the Euro. Otherwise, if economic data is weak, the Euro is likely to fall. Economic data for the four largest economies in the euro area (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozone’s economy.
Another significant data release for the Euro is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought after exports then its currency will gain in value purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.
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