Canadian Dollar retains gains as easing safe-haven demand weighs on US Dollar

• Continued diplomatic efforts in the Middle East are reducing safe-haven demand for the US Dollar, leaving USD/CAD under pressure.
• Falling oil prices could put the commodity-linked Canadian Dollar under considerable pressure.
• Strong US economic releases, alongside elevated expectations of a Fed rate increase, could underpin the US Dollar.

At around 1.3970 in Monday’s Asian session, USD/CAD is recovering from a gap lower at the open but continues to trade in negative territory. Reduced demand for safe havens is weighing on the US Dollar (USD), keeping the pair below its previous close. Diplomatic efforts to bring the Middle East conflict to an end continue, although concerns persist over the possibility of renewed US military action against Iran. Talks between Qatari and Iranian officials entered a third consecutive day as they sought an agreement to end the war before the US midterm elections.

The pair’s downside is nevertheless limited by the prospect of weaker oil prices putting pressure on the commodity-linked Canadian Dollar. Crude fell after OPEC+ agreed to leave December oil production targets unchanged, retaining required output at September levels. The agreement sets Saudi Arabia’s allocation at 10.478 million barrels per day (bpd), with Russia allocated 9.949 million bpd and Iraq 4.431 million bpd.

Growing expectations of a Federal Reserve interest rate increase could, in turn, help the US Dollar recover. Traders assign roughly a 75% probability to a December rate rise, according to the CME FedWatch Tool. Recent US macroeconomic releases showing a resilient economy and persistent inflation have bolstered those expectations.

Attention is also turning to forthcoming releases, notably the US Nonfarm Payrolls (NFP) report and ISM manufacturing and services figures. Several Federal Reserve officials are due to speak during the week, with their comments expected to provide further indications of the central bank’s monetary policy trajectory.

US PCE figures reshape the Dollar outlook as inflation progress stalls

The latest September US PCE report “confirms that progress on inflation has stalled.” That is the assessment of strategists at Brown Brothers Harriman, who point out that the figures matched consensus: “headline PCE rose 0.5% m/m vs. +0.3% in August to be up 3.6% y/y vs. 3.4% in August,” while “core PCE was up 0.3% m/m vs. 0.3% in August to be up 3.1% y/y vs. 3.0% in August.” Firmer readings across both headline and core measures support their assessment that disinflation has lost pace. The lack of further progress on inflation is consequently becoming an increasingly important part of the outlook for the Dollar and interest rates.