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Canadian Dollar remains on the front foot as USD bulls turn cautious ahead of Fed decision

  • USD/CAD remains on the defensive for the second straight day amid a combination of factors.
  • Rebounding oil prices underpin the Loonie and weigh on the pair amid subdued USD demand.
  • The downside seems limited amid US-Iran tensions and ahead of the key FOMC rate decision.

The USD/CAD pair is seen consolidating around the 1.4100 mark during the Asian session as traders keenly await the outcome of a two-day FOMC policy meeting, due later this Wednesday. Investors will look for fresh cues about the US Federal Reserve’s (Fed) future policy path, which will play a key role in influencing the near-term US Dollar (USD) price dynamics and provide a fresh impetus to the currency pair.

In the meantime, the USD remains on the defensive below a one-month top, touched on Tuesday, as bulls turn cautious heading into the key central bank event risk. Furthermore, a solid recovery in crude oil prices from an over two-week low underpins the commodity-linked Loonie and turns out to be another factor acting as a headwind for the USD/CAD pair. However, persistent geopolitical uncertainties should support the safe-haven Greenback and limit the downside for the currency pair.

In fact, Iran’s Islamic Revolutionary Guard Corps (IRGC) launched multiple ballistic missiles at US forces in the Middle East on Tuesday. Separately, Central Command said the US military and Saudi Arabian forces conducted joint strikes against Iran-aligned terrorists in Iraq. Moreover, President Donald Trump issued a fresh warning that the US will return to strong military action, targeting key Iranian infrastructure, if diplomatic efforts do not bring a rapid resolution to the crisis in the Middle East.

This marks a fresh escalation of tensions in the Middle East and triggers a fresh leg up in crude oil prices, reviving inflation fears and bolstering bets for at least one interest rate hike by the Fed in 2026. This marks a significant divergence in comparison to the Bank of Canada’s (BoC) dovish bias, which should cap the Canadian Dollar (CAD). Hence, it will be prudent to wait for strong follow-through selling before confirming that the recent USD/CAD recovery from a one-month low has run out of steam.

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United States Dollar Index (DXY) flat below 101.50 as bulls await FOMC amid Iran risks

  • DXY bulls remain on the sidelines ahead of the crucial FOMC decision later this Wednesday.
  • Persistent geopolitical uncertainties continue to act as a tailwind for the safe-haven buck.
  • Rebounding oil prices revive inflation fears and Fed rate hike bets, favoring bullish traders.

The United States Dollar Index (DXY), which tracks the Greenback against a basket of currencies, is seen consolidating below the 101.50 level during the Asian session as traders await the outcome of a two-day FOMC meeting, due later this Wednesday. The Index, however, retains a bullish undertone near an over one-month high, touched on Tuesday, and seems poised to appreciate further amid persistent geopolitical uncertainties.

Iran’s Islamic Revolutionary Guard Corps (IRGC) launched a surprise attack and targeted US forces in the Middle East with multiple ballistic missiles late Tuesday. Furthermore, President Donald Trump once again warned that the US will return to strong military action against Iran if diplomatic efforts do not bring a rapid resolution to the crisis. This fuels concerns about a fresh escalation of tensions in the region and prompts traders to price in the geopolitical risk premium, which should act as a tailwind for the safe-haven US Dollar (USD).

Meanwhile, the latest developments trigger a sharp rally in crude oil prices, reviving inflation fears and raising prospects for an interest rate hike by the US Federal Reserve (Fed). This might further hold back traders from placing aggressive bearish bets on the DXY and warrants some caution before positioning for deeper losses. The upside, however, seems capped as investors opt to wait for the crucial FOMC policy decision, due later today. Investors will look for more cues about the Fed’s future policy path, which should provide a fresh impetus to the USD.

Economists at DBS highlight that investors remain “highly cautious about the upcoming FOMC meeting (decision due 30 July 2am, SGT),” noting that the recent “pause in US-Iran hostilities did prompt a correction lower in crude oil prices” but has not materially eased policy concerns. According to DBS, the market is still “assigning 34% odds that the Fed would hike this week and close to 100% odds for the meeting in September,” underscoring persistent expectations that the Fed will resume tightening even as near-term geopolitical risk premia in oil have partially unwound.

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South Korean Won Rises to Nearly 3-Month High

The South Korean won strengthened to around 1,451 per dollar in late July, reaching its highest level since early May, supported by expectations for tighter monetary policy and improved domestic fundamentals. The Bank of Korea reiterated that maintaining a tightening stance remains necessary amid persistent inflation pressures, following its recent rate hike to 2.75%, while highlighting stronger exports and investment as factors supporting continued economic growth. The currency also received support from SK hynix converting proceeds from its US listing into won, boosting demand for the local currency despite foreign investors selling South Korean equities. Meanwhile, gains were limited by uncertainty surrounding the Federal Reserve’s policy outlook, with markets still weighing the possibility of higher US interest rates. Volatility in the global semiconductor market also continued to influence broader risk sentiment.

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Trade of The Day – USD/NOK

Facts

  • USDNOK returned today above the 10- and 30-day exponential moving averages (EMA10 and EMA30).
  • The yield spread between US and Norwegian 10-year government bonds (US-NOR) has widened by approximately 8 basis points over the past month (today vs. June 26).
  • The swap market is fully pricing in a September interest rate hike in the US.

Recommendation

  • Position : Long (BUY) on USDNOK at market price
  • Target Price (Take Profit; TP): 9.9000 (TP1), 10.0000 (TP2)
  • Stop Loss (SL): 9.5450

Source: xStation5

Opinion

After breaking out to a 5-month high in late June, USDNOK entered a local downtrend driven by the resurgence of military actions in the Persian Gulf and rising oil prices. The ~4% correction ended on Monday, and the exchange rate is currently attempting to break out of this downtrend, aided by falling oil prices that are weakening the Norwegian krone. A rebound in USDNOK should be supported by the Federal Reserve’s increasingly hawkish stance. During the central banking forum in Sintra, Kevin Warsh explicitly identified inflation as enemy number one, emphasizing that the Fed will not tolerate inflation above target and suggesting it will not take AI-driven productivity gains for granted. A hawkish Fed is also backed by the recent series of US economic data (jobless claims at their lowest since 1969, a stable unemployment rate, and better-than-expected PMI readings indicating expansion in the private sector). The gathering economic momentum, accompanied by sticky inflation above 3%, is driving interest rate expectations across all time horizons (e.g., the year-end rate implied by the swap market rose from 4.00% to 4.05% over the past month). Expectations for Norges Bank are also hawkish (the swap market is pricing in a 25 bps hike by the end of the year), but they are gaining momentum more slowly than those for the US, as evidenced by the upward trend in the 10-year yield spread between the two economies. A renewal of upward pressure on oil prices could naturally strengthen the NOK; however, geopolitical risk simultaneously supports the dollar, which should limit any non-monetary-policy-driven declines in USDNOK.

Methodology

This recommendation was prepared based on a technical analysis of the USDNOK chart and a fundamental analysis of the respective economies (monetary policy in Norway and the United States). The directional bias was determined using moving averages and market expectations regarding central bank policies. Take Profit and Stop Loss levels were established using Fibonacci retracements and price action:

  • TP1 is set at the recent peak.
  • TP2 is set at the next key resistance level.
  • SL is placed at the 61.8% Fibonacci retracement level of the April–May 2026 downward wave.
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Euro revisits monthly low against US Dollar in countdown to Fed’s policy

  • EUR/USD slides to the monthly low near 1.1362 amid caution ahead of the Fed’s policy.
  • Investors await German and Eurozone preliminary HICP data for July.
  • ECB’s Kazimir stresses the need for at least one interest rate hike amid high inflationary pressures.

The Euro (EUR) falls to its monthly low at around 1.1362 against the US Dollar (USD) during the early European trading session on Tuesday. The major currency pair weakens as the US Dollar extends gains amid caution ahead of the Federal Reserve’s (Fed) monetary policy announcement on Wednesday.

At press time, the US Dollar Index (DXY), which gauges the Greenback’s value against six major currencies, trades marginally higher, closer to its monthly high of around 101.59.

US Dollar Price This week

The table below shows the percentage change of US Dollar (USD) against listed major currencies this week. US Dollar was the strongest against the New Zealand Dollar.

USDEURGBPJPYCADAUDNZDCHF
USD0.24%0.34%0.05%0.22%0.48%0.66%0.37%
EUR-0.24%0.08%-0.19%-0.02%0.25%0.42%0.13%
GBP-0.34%-0.08%-0.39%-0.07%0.17%0.33%0.04%
JPY-0.05%0.19%0.39%0.16%0.43%0.61%0.23%
CAD-0.22%0.02%0.07%-0.16%0.24%0.44%0.15%
AUD-0.48%-0.25%-0.17%-0.43%-0.24%0.17%-0.12%
NZD-0.66%-0.42%-0.33%-0.61%-0.44%-0.17%-0.29%
CHF-0.37%-0.13%-0.04%-0.23%-0.15%0.12%0.29%

The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the US Dollar from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent USD (base)/JPY (quote).

In the policy meeting, the Fed is highly expected to leave interest rates unchanged in the range of 3.50%-3.75%. The CME FedWatch tool shows a 62% chance that the Fed will maintain the status quo.

Investors will pay close attention to the Fed’s monetary policy statement and Chairman Kevin Warsh’s press conference to get fresh cues regarding inflation and the economic outlook. The Fed is unlikely to deliver any remarks regarding the monetary policy outlook, as Warsh said in its last policy press conference that “so-called forward guidance is not well-suited in the current policy juncture”.

The CME FedWatch tool shows that the odds of the Fed delivering an interest rate hike in the next policy meeting in September are 80.8%.

On the Eurozone front, investors await the German and Eurozone preliminary Harmonized Index of Consumer Prices (HICP) data for July, which will be released on Thursday and Friday, respectively.

Investors will closely track the inflation data as it is expected to significantly influence European Central Bank (ECB) interest rate expectations. On Monday, ECB Governing Council member and Governor of the National Bank of Slovakia (NBS), Peter Kazimir, said that at least one interest rate hike will be needed to contain elevated inflationary pressures.

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United States Dollar Index remains subdued near 101.50 amid Fed policy uncertainty

  • US Dollar Index remained flat amid a rare level of uncertainty heading into a Fed decision.
  • Traders expect the Federal Reserve to hold interest rates steady this week, with possible hikes delayed to September.
  • Donald Trump warned military strikes against Iran could resume if diplomatic negotiations collapse.

The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, is losing ground after three days of gains and trading around 101.50 during the Asian session on Tuesday.

The Greenback moves little amid market caution ahead of the Federal Reserve’s policy decision on Wednesday. According to the CME FedWatch Tool, markets are pricing in nearly a 38% chance of a rate hike in July, an unusually high level of uncertainty so close to a meeting. Citadel Securities expects the Fed to deliver a rate increase to solidify Chairman Kevin Warsh’s inflation-fighting credibility following his repeated promises to restore price stability. Looking further ahead, the probability of at least a 25-basis-point hike in September currently sits at approximately 81.4%.

President Donald Trump stated that the US is engaged in “good talks” with Iran to resolve the Middle East conflict. While Washington suspended its 13-night strike campaign over the weekend, leading to three consecutive days without attacks. Tehran’s foreign ministry countered that no direct negotiations with the US are taking place, noting its only active dialogue is with Oman regarding the future of the Strait. Even so, the diplomatic developments helped push oil prices down, easing broader inflation and monetary policy concerns.

Washington suspended its 13-night strike campaign over the weekend, leading to three consecutive days without attacks. Tehran’s foreign ministry countered that no direct negotiations with the US are taking place, noting its only active dialogue is with Oman regarding the future of the Strait.

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Japanese Yen flattens against US Dollar while Fed’s policy takes centre stage

  • USD/JPY flattens at around 163.75 in the countdown to the Fed’s monetary policy.
  • The Fed and the BoJ are expected to hold interest rates steady.
  • The BoJ will likely maintain hawkish monetary policy guidance.

The Japanese Yen (JPY) trades flat against the US Dollar (USD) at around 163.75 during the Asian trading session on Tuesday. The USD/JPY pair struggles for direction as investors have sidelined ahead of the Federal Reserve’s (Fed) monetary policy announcement on Wednesday.

At press time, the US Dollar Index (DXY), which gauges the Greenback’s value against six major currencies, trades marginally lower to near 101.46.

According to the CME FedWatch tool, traders see a 62% chance that the Fed will leave interest rates unchanged in the range of 3.50%-3.75%. The tool also shows a strong possibility of an interest rate hike in the September policy meeting.

Investors should not expect any guidance on the interest rate outlook in the monetary policy statement and Chairman Kevin Warsh’s press conference, as he clarified in the last meeting that “so-called forward guidance is not well-suited in the current policy juncture”.

Market participants would like to know for how long the United States (US) inflation will stay above the central bank’s 2% target.

On the Tokyo front, investors also await the Bank of Japan (BoJ) monetary policy announcement on Friday. The BoJ is expected to leave interest rates unchanged at 1% and deliver hawkish remarks on the monetary policy outlook.

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New Zealand Dollar struggles above mid-0.5700s as USD stays firm ahead of FOMC meeting

  • NZD/USD struggles to capitalize on a modest Asian session rise amid a bullish USD undertone.
  • Geopolitical uncertainties continue to underpin the safe-haven buck and weigh on spot prices.
  • Traders, however, seem hesitant and move to the sidelines ahead of the crucial FOMC meeting.

The NZD/USD pair turns lower for the second consecutive day following a modest Asian session uptick to the 0.5785 region on Tuesday. Spot prices currently trade around the 0.5770-0.5765 area, just above last week’s swing low, as the US Dollar (USD) retains its bullish undertone amid geopolitical uncertainties.

The US paused its bombing campaign against Iran following roughly two weeks of strikes. Moreover, US President Donald Trump said on Monday the US was having good talks with Iran and that there was a chance of a resolution. This raised hopes of pulling the US and Iran back to the negotiating table, though the optimism fades rather quickly after Saudi Arabia, Jordan and Iraq reported drone attacks. Moreover, Trump warned that US strikes would resume if the negotiations failed to deliver, helping the safe-haven USD preserve its recent strong gains back closer to the monthly high, which continues to weigh on the NZD/USD pair.

Traders, however, seem hesitant to place aggressive bets ahead of the highly anticipated two-day FOMC policy meeting, starting later today. The US Federal Reserve (Fed) will announce its decision on Wednesday and is expected to leave rates unchanged. Hence, the focus will be on the accompanying policy statement and the post-meeting press conference. Investors will look for cues about the Fed’s future policy path, which will influence the Greenback and drive the NZD/USD pair. In the meantime, firming expectations that the Reserve Bank of New Zealand (RBNZ) will deliver another rate hike in September could support the New Zealand Dollar (NZD).

Strategists at Brown Brothers Harriman argue that “above target inflation and a more favorable domestic growth outlook argue for additional RBNZ rate hikes which is NZD supportive.” They note that at its 8 July meeting, the RBNZ lifted the Official Cash Rate by 25bp to 2.50% and signalled that “further OCR increases appear likely at upcoming meetings.” Reflecting this hawkish bias, BBH highlight that “the swaps curve price in 60bps hikes by year-end and a total of 100bps of tightening over the next twelve months to 3.50% – near the top of the RBNZ estimated neutral range (2.20%-4.10%).”