Canadian Dollar holds steady amid oil uncertainties, hawkish Fed sentiment

USD/CAD steadies after three days of gains, trading around 1.4100 during Asian hours on Thursday. The USD/CAD pair has moved little as the commodity-linked Canadian Dollar (CAD) maintains its position amid cautious sentiment surrounding oil prices.

Crude oil prices may rise due to lingering uncertainty surrounding United States-Iran diplomatic talks. Speaking at the UN General Assembly, Iranian President Masoud Pezeshkian declared that Tehran would not yield to threats, reaffirming the country's right to pursue nuclear technology for economic development. Pezeshkian also emphasized that Iran would restrict freedom of navigation through the strategic Strait of Hormuz for as long as US sanctions and blockades remain active.

CAD faces widening yield drag and seasonal Q4 headwinds

Strategists at Scotiabank caution that the Canadian Dollar’s underlying backdrop remains challenging, emphasizing that “wide spreads are the biggest drag on the CAD’s fundamental performance.” They add that “negative CAD seasonality in Q4 means the risk of stronger headwinds for the CAD in the coming weeks,” reinforcing the view that the currency could stay on the defensive as the year-end approaches.

However, the USD/CAD pair may gain ground as the US Dollar (USD) receives support from hawkish Federal Reserve (Fed) expectations and resilient domestic economic indicators. This momentum was highlighted by the latest Flash US S&P Global PMI data for September, which showed manufacturing expanding faster than expected at 52.0, helping offset slight pullbacks in services and composite activity.

Following US economic signals, market expectations for a 25-basis-point Fed rate hike in October surged to nearly 69.7%, up sharply from 48.7% last week. Traders are now turning their attention to the upcoming US weekly Initial Jobless Claims report. At the same time, several Fed officials have reiterated support for the recent rate increase and issued fresh warnings regarding persistent inflation risks.

Fed’s Barr flags more hikes as inflation risks rise, supporting Dollar upside

Fed’s Barr delivered a distinctly hawkish message, with an FXS Speechtracker score of 8/10, above the historical average of 7/10 and signaling a stronger-than-usual tightening bias. The assertion that “further rate hikes [are] likely needed to ensure timely return to 2% inflation,” alongside comments that inflation risks have increased while labor market risks have receded, underscores a clear preference for additional policy tightening in the face of strong growth and a solid labor market. By stating the Fed was “out of position” and needed to “recalibrate” policy, Barr reinforces the narrative that the current stance may still be too loose, a backdrop that is typically supportive for the Dollar and negative for risk-sensitive assets.

The FXS Fed Sentiment Index rose by 0.42 points to 148.81, firmly in hawkish territory and consistent with the elevated FXS Speechtracker reading. This move signals a meaningful reinforcement of the market’s perception that the Fed is biased toward further tightening, a dynamic that should continue to underpin Dollar strength against lower-yielding currencies.

Technical Analysis:

In the daily chart, USD/CAD trades at 1.4100. The pair holds firmly above both the nine- and 50-period Exponential Moving Averages (EMAs), which suggests a constructive bullish bias in the near term as short- and medium-term trend signals align. The 14-day Relative Strength Index (RSI) at 69.74 flirts with overbought territory, hinting that upside momentum is strong but vulnerable to bouts of consolidation or minor corrective pullbacks.

On the downside, immediate support emerges from the nine-period EMA at 1.4017, with the 50-period EMA at 1.3946 reinforcing a broader demand zone on deeper dips. As long as the USD/CAD pair holds above these moving averages, buyers are likely to defend setbacks, keeping the focus on the topside even if near-term gains become more measured given the stretched RSI backdrop.