• USD/CAD advances ahead of Fed and BoC rate decisions, supported by general market caution.
• Markets price in an 89.5% chance of an October Fed rate pause, with potential hikes delayed until December.
• Falling crude prices, triggered by Middle East diplomatic talks, further pressure the commodity-linked Canadian Dollar.

USD/CAD gains ground for the second successive day, trading around 1.4020 during Asian hours on Tuesday. The pair rises as the US Dollar (USD) continues to gain ground, driven by market caution ahead of interest rate decisions by the US Federal Reserve (Fed) and the Bank of Canada (BoC) due Wednesday.

Financial markets expect the Federal Reserve to keep interest rates unchanged at its upcoming October meeting before potentially hiking rates again in December. According to the CME FedWatch Tool, market pricing currently reflects an 89.5% probability of a rate pause at the October policy meeting, alongside an 82.3% chance of a rate increase in December.

Heather Long, chief economist at Navy Federal Credit Union, said that “Inflation is still the No. 1 problem in the US economy, and there are a lot of signs it is getting more broad-based.” “For consumers, it means really high borrowing costs for the foreseeable future.” However, “given that it’s right before an election,” Heather added, “they won’t hike in October.”

The USD/CAD pair gains support as the commodity-linked Canadian Dollar (CAD) faces challenges amid a decline in oil prices. Crude oil prices fell as renewed diplomatic efforts in the Middle East raised hopes of preventing a wider escalation of the US-Iran conflict.

Following high-level talks held in Tehran, Iran, Saudi Arabia, Pakistan, and Turkey agreed on Monday to continue security discussions and enhance regional cooperation, according to Islamic Republic of Iran Broadcasting (IRIB). A joint statement released after the first meeting between Iran and senior officials representing the Mecca Joint Defence Agreement stated that the four countries had agreed to maintain dialogue and consultations, particularly concerning regional peace, security, and stability.

Canadian Prime Minister Mark Carney said on Monday that the country has not changed its position in trade talks with the United States (US). Carney added that any progress made is because Washington moved closer to Canada’s position.

BoC hike risk rises as markets price in four moves by 2027

Analysts at Commerzbank highlight that Governor Tiff Macklem’s recent communication has materially shifted the policy outlook, noting that “Macklem’s latest comments have significantly increased the risk of an imminent rate hike, and we therefore expect an initial move before the end of this year.” They point out that “market participants assign an 85% probability to a rate hike this week, and we also expect a hike given the recent more hawkish comments,” but caution that “we nevertheless consider such a move due to the subdued core inflation premature.” Looking further ahead, Commerzbank observes that “a total of four rate hikes are priced in by September 2027,” underscoring how aggressively markets have adjusted their expectations for the BoC policy path.