The Canadian Dollar (CAD) fell sharply on Monday, with USD/CAD trading higher near 1.4060 after recovering from below 1.4000, as softer-than-expected Canadian inflation data weighed on the Loonie [1]. Canada’s Consumer Price Index (CPI) declined 0.4% month-over-month in June, compared to expectations for a 0.2% fall and the previous 1.0% increase. Annual inflation slowed to 2.8% from 3.2%, slightly below the 2.9% market forecast [1]. The Bank of Canada’s Core CPI also moderated, falling to 0.2% MoM from 0.6%, with the annual rate easing to 2.1% from 2.2% [1]. These figures reinforced expectations that the Bank of Canada may not need to raise interest rates again, placing additional pressure on the CAD [1].
Meanwhile, the US Dollar Index (DXY) advanced around 0.2% to trade near 101.00, supported by heightened demand for safe-haven assets amid escalating tensions in the Middle East [1][2]. At the time of reporting, DXY was trading around 100.95 after rebounding from an intraday low of 100.65 [2]. US President Donald Trump stated, "Every time Iran kills an American Soldier they will pay for that killing many times over!" as the US conducted a ninth consecutive night of strikes against Iran [2]. Additionally, Yemen’s Iran-aligned Houthis declared an immediate naval blockade against Saudi Arabia, raising concerns over regional shipping and energy supplies [2].
Despite a rebound in West Texas Intermediate (WTI) crude oil prices—trading over 1% higher near $83.50 per barrel according to one source [1], and around $82 after recovering from an intraday low of $79.48 according to another [2]—the Canadian Dollar received limited support, as inflation-driven weakness dominated its performance [1][2]. The rise in oil prices has kept energy-driven inflation risks elevated and supports expectations that the Federal Reserve could raise interest rates later this year, with markets assigning around a 63% probability to a Fed rate hike in September according to the CME FedWatch Tool [2].
Technical analysis shows USD/CAD trading at 1.4056 in a neutral-to-bearish configuration, consolidating below the 100-period Simple Moving Average at 1.4149, with the Relative Strength Index around 51, indicating recovered momentum but lacking a strong directional impulse [1]. The US Dollar was the strongest against the Swiss Franc, gaining 0.32%, and rose 0.26% against the Canadian Dollar on the day [2].
Looking ahead, investors are monitoring the US ADP Employment Change four-week average, with the previous reading at 19.75K. A slowdown could limit USD/CAD’s advance, while a stronger figure may support Treasury yields and help the pair extend its recovery [1]. The US economic calendar is otherwise quiet, with Initial Jobless Claims due Thursday and preliminary July PMI data on Friday [2].
CONCLUSION
Softer Canadian inflation data and rising geopolitical tensions in the Middle East have driven the Canadian Dollar lower and boosted demand for the US Dollar. Despite higher oil prices, the Loonie remains under pressure, while expectations for a potential Fed rate hike continue to support the Greenback. Market participants are closely watching upcoming US employment data and developments in the Middle East for further direction.