The USD/CAD pair saw a slight rebound during the Asian trading session on Wednesday, following a brief pullback after hitting a new high since mid-April near 1.3775. However, with the US Dollar Index maintaining its strength, the overall structure of USD/CAD remains bullish. The primary market driver continues to be global risk aversion stemming from escalating tensions in the Middle East. The US President previously stated that, after receiving requests from Gulf state leaders, the US temporarily postponed new military actions against Iran but emphasized that the US might "need to strike Iran again" in the future.
Simultaneously, negotiations between the US and Iran lack substantive progress, with clear disagreements remaining on nuclear issues and transportation in the Strait of Hormuz. Market concerns are widespread that continued escalation in the Middle East could further impact the stability of global energy supplies. As the Strait of Hormuz handles approximately 20% of the world's seaborne crude oil shipments, any risk of transportation disruption could quickly push up international oil prices and reignite global inflation concerns. This is one of the key reasons for the current strength of the US dollar.
The US Dollar Index rose to its highest level since April 7 on Tuesday, indicating continued market demand for safe-haven assets. Additionally, elevated US Treasury yields further enhance the attractiveness of the US dollar.
From a monetary policy perspective, market expectations for the Federal Reserve to maintain high interest rates in the future are regaining momentum. According to the CME FedWatch Tool, traders are now pricing in a probability exceeding 55% for the Fed to hike rates by 25 basis points or more in 2026. This shift in expectations suggests the market believes US inflation risks may persist longer than previously anticipated, a view further reinforced by rising international oil prices.
Persistently high yields on long-term US Treasury bonds continue to attract capital inflows into US dollar-denominated assets. Particularly amid heightened global risk aversion, the US dollar benefits from its dual attributes of "high yield" and "safe-haven." However, the market remains cautious ahead of the Federal Reserve's meeting minutes, with some dollar bulls temporarily slowing their pace of buying ahead of this key event.
For the Canadian dollar, rising international oil prices provide some relief to the local currency. As a major global energy exporter, Canada typically benefits from improved terms of trade during periods of rising oil prices, thereby supporting the Canadian dollar. Although Canada's recent consumer inflation data came in weaker than market expectations, the high level of WTI crude oil has prevented a significant unilateral decline in the Canadian dollar.
The market currently believes that as long as international crude oil prices remain strong, the Canadian dollar retains some defensive capacity. However, given the overall strength of the US dollar, the broader trend for USD/CAD remains upward. Additionally, the Canadian economy faces some pressure recently. With rising risks of a global economic slowdown, Canadian export demand may be affected. Furthermore, if the US maintains high interest rates over the long term, it could further widen the interest rate differential between the US and Canada, thereby continuing to support USD/CAD.
From a technical perspective, the daily chart structure of USD/CAD has clearly strengthened. After successfully breaking through the key resistance level of 1.3650, bullish momentum has continued to build, with the pair re-establishing itself above both the 50-day and 200-day Exponential Moving Averages. The 50-day EMA is currently near 1.3560, while the 200-day EMA is around 1.3480, indicating that the medium- to long-term trend is gradually shifting towards a bullish structure. The daily chart shows that since rebounding from the May low near 1.3420, USD/CAD has formed a clear ascending channel pattern. Recent consecutive positive closes reflect sustained market bullish sentiment. On the upside, the 1.3780 area has become the first key resistance level. If the US dollar continues to strengthen, USD/CAD has the potential to test the 1.3850 area further, or even challenge the 1.3900 vicinity again. On the downside, 1.3700 has become a significant short-term support area. If a technical correction occurs, the 1.3650 vicinity will serve as a more critical defensive level.
Overall, the current USD/CAD movement is primarily influenced by the dual forces of "strong US dollar as a safe haven" and "oil price support for the Canadian dollar." In the short term, Federal Reserve policy expectations, Middle East developments, and changes in international crude oil prices will remain the core variables determining the direction of USD/CAD.
The USD/CAD market has entered a clearly bullish phase. Persistent tensions in the Middle East, high international oil prices, and hawkish Federal Reserve expectations collectively support the strength of the US dollar. Although rising oil prices provide some support for the Canadian dollar, it is difficult for the currency to fully offset the upward pressure on USD/CAD against the backdrop of overall US dollar strength. From a technical structure perspective, the medium- to short-term trend for USD/CAD remains bullish, though the pair is gradually approaching a near-term high area. Future market focus will center on the Federal Reserve meeting minutes, developments in the Middle East, and international oil price movements. If global risk aversion continues to intensify, USD/CAD may have further room to rise.
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