Canadian Dollar gains as US Dollar struggles despite rising Fed rate hike bets

USD/CAD extends its losses for the second successive day, trading around 1.3800 during the Asian hours on Tuesday. Analysts at HSBC caution that, despite the recent improvement in sentiment around the Fed’s anti-inflation stance, broader structural issues have not disappeared. They highlight ongoing worries over US fiscal sustainability, noting that they “remain cautious about broader structural concerns, especially around US fiscal sustainability, which could still return and weigh on the Dollar yet again.”

The USD/CAD pair depreciates as the US Dollar (USD) declines, despite growing expectations of a Federal Reserve (Fed) rate hike in September. A stronger-than-expected August US jobs report raised Fed rate-hike odds to above 60%, with Nonfarm Payrolls (NFP) adding 162,000 jobs while the Unemployment Rate held steady. Investors are now turning their attention to the upcoming US Producer Price Index and Consumer Price Index inflation figures due later this week.

While the Greenback could draw support from safe-haven demand stemming from Middle East tensions, the USD/CAD pair continues to face downward pressure as the Canadian Dollar (CAD) strengthens on the back of rising crude oil prices.

West Texas Intermediate crude is hovering near three-month highs around $90.50 per barrel, driven by escalating conflict in the Middle East. Crude prices surged nearly 10% last week following increased military activity around the Strait of Hormuz and a recent attack on Saudi Aramco’s Jazan facilities. Prices could rise further as Iran threatens to target regional energy infrastructure in response to US actions, while Tehran's potential agreement with Oman to manage shipping through Hormuz raises additional supply control concerns.