Traders now see an 80% chance of a Fed rate increase by year-end, lifting the USD and pressuring the Canadian dollar.
The USD/CAD pair climbed above 1.3950 on Thursday, extending its rebound from a two-month low near 1.3900. The move follows a fourth consecutive day of gains for the USD Index (DXY), which hit a two-week high amid renewed hawkish Fed expectations driven by volatile oil prices.
Markets are pricing in an 80% probability of a Fed rate hike by the end of 2024, according to the CME Group’s FedWatch Tool. The USD’s strength follows a bounce from post-CPI lows, while geopolitical tensions in the Middle East, including US-Iran standoffs and attacks on Red Sea vessels, have supported crude prices.
Higher oil prices could provide some support to the commodity-linked Canadian dollar, though the broader USD rally remains the dominant driver for the pair.