Canadian Dollar holds gains as US Dollar struggles on easing safe-haven demand

• USD/CAD remains subdued on easing safe-haven demand for the US Dollar amid ongoing Middle East diplomatic efforts.
• The Canadian Dollar may face headwinds as lower oil prices weigh heavily on the commodity-linked currency.
• Robust US economic data and high Fed rate hike expectations may support the US Dollar.

USD/CAD gains ground after opening at a bearish gap, remaining in negative territory and trading around 1.3970 during Asian hours on Monday. The pair holds losses as the US Dollar (USD) struggles due to easing safe-haven demand, driven by ongoing diplomatic efforts to end the Middle East conflict despite lingering fears of renewed US military action against Iran. Qatari and Iranian officials continued discussions for a third consecutive day, working toward an agreement to end the war ahead of the US midterm elections.

However, downside pressure on the USD/CAD pair remains restrained as the commodity-linked Canadian Dollar could face headwinds from falling oil prices. Crude prices declined following an agreement by OPEC+ to maintain steady oil production targets for December, keeping required production at September levels. Under this arrangement, Saudi Arabia’s allocation is set at 10.478 million barrels per day (bpd), followed by Russia at 9.949 million bpd and Iraq at 4.431 million bpd.

Meanwhile, the US Dollar could regain ground on rising expectations for a Federal Reserve rate hike. According to the CME FedWatch Tool, traders are pricing in roughly a 75% chance of a December rate increase, boosted by recent US macroeconomic data pointing to economic resilience and persistent inflation.

Moreover, market participants are focused on key upcoming events, including the US Nonfarm Payrolls (NFP) report and ISM manufacturing and services data. Remarks from several Federal Reserve officials scheduled throughout the week are also expected to offer further guidance on the central bank’s monetary policy path.

Dollar narrative shifts as US PCE data show inflation progress has stalled

Strategists at Brown Brothers Harriman highlight that the latest US September PCE report “confirms that progress on inflation has stalled.” They note that, in line with 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.” This combination of firmer headline and core readings underpins their view that the disinflation trend has lost momentum, reinforcing the backdrop of stalled inflation progress that is increasingly central to the current Dollar and rates narrative.