The US Dollar Index (DXY) and the USD/CAD currency pair both traded in narrow ranges following the release of the US Consumer Price Index (CPI) report for July, which indicated moderating inflation. Headline CPI rose 3.4% year-over-year in July, down from 3.5% in June, while core CPI increased 2.5% year-over-year compared to 2.6% the previous month, with both figures matching market forecasts [1]. The modest monthly increase in CPI was attributed to retreating energy prices, with gasoline prices falling 3% month-over-month, and slowing food inflation [1].
The softer inflation data, combined with last Friday's weak US Nonfarm Payrolls report, led traders to further reduce expectations for an immediate Federal Reserve interest rate hike. According to the CME FedWatch tool, the probability of a September rate hike is now around 40.1%, while the odds for an October increase dropped to approximately 60% from 75% the previous day. The next potential rate hike is not fully priced in until December [1]. This recalibration of Fed expectations has acted as a headwind for the US Dollar, with the DXY stalling near the 100.00 psychological mark and remaining within a two-week-old range [2].
Meanwhile, the Canadian Dollar has been pressured by declining oil prices, following downward revisions to global demand forecasts for 2026. OPEC reduced its 2026 world oil demand growth projection to 580,000 barrels per day, while the International Energy Agency forecasted a 1.6 million barrels per day contraction in consumption this year, a notable drop from its previous estimate of a 1 million barrels per day decline [1].
Geopolitical tensions in the Middle East, particularly the US-Iran standoff, have contributed to volatility in oil prices. US President Donald Trump stated that the US has "total control" over the Strait of Hormuz, while Iran reiterated its own control over the waterway [1][2]. These developments have kept geopolitical risks and the prospects for some Fed tightening in play, providing some support for the DXY [2].
Looking ahead, market participants are awaiting the release of the US Producer Price Index (PPI) and comments from influential FOMC members, as well as further developments in the Middle East, which are expected to influence US Dollar demand [2]. Technical analysis indicates that the DXY holds above the 50-period Simple Moving Average at 99.82, maintaining a mild bullish near-term bias, but a sustained break above 100.00 is needed for further gains [2].
CONCLUSION
US inflation data for July came in as expected, leading to a reduction in near-term Fed rate hike expectations and keeping the US Dollar and Canadian Dollar in tight trading ranges. Oil price declines and ongoing geopolitical tensions are influencing both currencies, with market participants now focused on upcoming US PPI data and further Fed commentary. The overall market sentiment remains cautious amid mixed signals from inflation, central bank policy, and geopolitical developments.