Canadian Dollar strengthens despite hawkish Fed rhetoric

The USD/CAD pair edges lower to around 1.3890 during the Asian trading hours on Monday. Renewed tensions between the US and Iran boost crude oil prices, supporting the commodity-linked Canadian Dollar (CAD) against the US Dollar (USD). Traders await employment reports from the US and Canada, due on Friday. 

US officials said on Sunday that US forces struck two Iranian launchers on Iran's Larak island, marking the first known American strikes on Iran since late July, per the BBC. 

Iran’s Islamic Revolutionary Guard Corps (IRGC) stated that Sunday's attack killed and wounded several people, and vowed "response and punishment". Iranian military later said it had launched an attack on US military targets in Jordan. It is worth noting that Canada is a major oil-exporting country, and high crude oil prices generally have a positive impact on the CAD. 

However, hawkish Federal Reserve (Fed) rhetoric could provide some support to the Greenback. Fed Chairman Kevin Warsh warned on Friday at the Jackson Hole economic symposium that inflation is not slowing significantly, and that unless policymakers become confident it is, the central bank has “work to do.” 

Canada data strength seen as already in the Dollar, but still a mild support

Scotiabank strategists note that recent Canadian releases have consistently beaten expectations, suggesting that “solid data is perhaps already priced in to the CAD to a degree, given that domestic data have generally outperformed expectations in recent weeks.” Even so, they add that the upcoming growth figures “may add modestly to CAD tailwinds in the short run,” reinforcing the currency’s underlying support without materially shifting the broader narrative.

Warsh flags unfinished inflation work as financial conditions stay loose

Fed Chair Warsh delivered a notably more hawkish-leaning message, with the FXS Speechtracker score at 7.4/10 compared to the established baseline of 6.5/10, underscoring heightened concern about price stability. The insistence that the Fed must be confident underlying inflation is moving to objective or “we have work to do,” combined with comments that financial conditions are not restrictive and credit and loan markets show few signs of policy restraint, points to a bias toward further tightening if inflation progress stalls. Warsh’s emphasis that summer inflation data are better but do not yet signal a meaningful change in underlying trends, alongside a firm reaffirmation of the 2% PCE target and a predominant focus on prices, reinforces a vigilant stance that is supportive of the Dollar and negative for risk-sensitive FX if markets price in additional policy action.

The FXS Fed Sentiment Index was unchanged, moving 0.00 points to a still-elevated level of 129.70, which keeps the policy tone firmly in hawkish territory despite the lack of incremental shift in the gauge. The combination of a high FXS Fed Sentiment Index level and an above-baseline FXS Speechtracker score suggests that markets will continue to interpret Fed communication as leaning toward tighter policy, with potential upside for the Dollar against lower-yielding currencies if incoming data fail to confirm a durable disinflation trend.

Technical Analysis: USD/CAD remains capped under the 100-day SMA

In the daily chart, USD/CAD retains a mildly bearish near-term bias as spot holds just under the 20-day Bollinger middle band and the 100-day simple moving average (SMA). The pair has retreated from the upper half of the recent Bollinger envelope toward its midline, while the Relative Strength Index (RSI) at 45.6 slips below the neutral 50 mark and hints at fading bullish momentum rather than outright selling pressure.

On the topside, initial resistance comes at the 20-day Bollinger SMA middle band at 1.3900, followed by the 100-day SMA at 1.3915, with a more decisive barrier at the 20-day Bollinger upper band near 1.4045. On the downside, the next significant support is located at the 20-day Bollinger lower band around 1.3750, where buyers are likely to emerge if the current soft tone extends into a deeper corrective pullback.