Canadian Dollar trims gains as US-Iran tensions and hawkish Fed outlook support US Dollar
- The Canadian Dollar trims intraday gains as geopolitical risks and Fed rate-hike expectations support the US Dollar.
- USD/CAD trades near April 2025 levels and remains set for a fourth consecutive weekly advance.
- Lower Oil prices cap gains in the commodity-linked Canadian Dollar as WTI falls to its lowest level since early March.
The Canadian Dollar (CAD) trims part of its intraday gains on Friday as uncertainty surrounding a final US-Iran peace agreement and expectations of a hawkish Federal Reserve (Fed) help the US Dollar (USD) recover some of its losses after coming under pressure from Thursday's broadly in-line US Personal Consumption Expenditures (PCE) report.
At the time of writing, USD/CAD trades around 1.1491, near levels last seen in April 2025. The pair remains on track for a fourth straight weekly advance.
US President Donald Trump said on Truth Social that Iran had launched "at least four one-way attack drones" at ships transiting the Strait of Hormuz, calling the incident "a foolish violation of our ceasefire agreement."
The United States and Iran reached a 60-day Memorandum of Understanding (MoU) earlier this month, but the latest round of talks showed that differences remain over inspections of Iran's nuclear program and the future management of the Strait of Hormuz.
On the monetary policy front, the latest US PCE data showed that core inflation remained relatively contained, suggesting that the Fed may remain patient on rate hikes. Still, the acceleration in headline inflation supports the view that the Fed could raise interest rates later this year.
The US Dollar Index (DXY), which tracks the Greenback's value against a basket of six major currencies, trades around 101.35 after hitting a more than one-year high near 101.80 earlier this week.
Traders are currently pricing in a 60% chance of a September Fed rate hike, down from 70% a week ago, according to the CME FedWatch Tool.
Minneapolis Fed President Neel Kashkari said on Friday, "I have one rate hike penciled in for 2026," adding, "I see rates on hold in 2027." Kashkari also said, "I am concerned about inflation, especially in services."
Meanwhile, lower Oil prices as shipping through the Strait of Hormuz gradually improves are capping gains in the commodity-linked Loonie, given Canada's status as a major crude exporter. West Texas Intermediate (WTI) crude trades around $69.20, its lowest level since early March and down roughly 9.5% this week.
Attention now turns to next week's economic calendar, including Canada's April Gross Domestic Product (GDP) report, the US Nonfarm Payrolls (NFP) report, and speeches from Federal Reserve Chair Kevin Warsh and Bank of Canada Governor Tiff Macklem.
Employment FAQs
Labor market conditions are a key element to assess the health of an economy and thus a key driver for currency valuation. High employment, or low unemployment, has positive implications for consumer spending and thus economic growth, boosting the value of the local currency. Moreover, a very tight labor market – a situation in which there is a shortage of workers to fill open positions – can also have implications on inflation levels and thus monetary policy as low labor supply and high demand leads to higher wages.
The pace at which salaries are growing in an economy is key for policymakers. High wage growth means that households have more money to spend, usually leading to price increases in consumer goods. In contrast to more volatile sources of inflation such as energy prices, wage growth is seen as a key component of underlying and persisting inflation as salary increases are unlikely to be undone. Central banks around the world pay close attention to wage growth data when deciding on monetary policy.
The weight that each central bank assigns to labor market conditions depends on its objectives. Some central banks explicitly have mandates related to the labor market beyond controlling inflation levels. The US Federal Reserve (Fed), for example, has the dual mandate of promoting maximum employment and stable prices. Meanwhile, the European Central Bank’s (ECB) sole mandate is to keep inflation under control. Still, and despite whatever mandates they have, labor market conditions are an important factor for policymakers given its significance as a gauge of the health of the economy and their direct relationship to inflation.