Canadian Dollar holds near three-month high vs weak USD before data

The USD/CAD pair remains under some selling pressure for the third consecutive day and trades near a three-month low, just above mid-1.3700s during the first half of the European session on Friday. Spot prices remain on track to register heavy losses for the fourth week in a row – also the sixth in the previous seven – and seem vulnerable amid a combination of negative factors.

Crude oil prices hold steady near a three-week high as traders continue to price in the geopolitical risk premium amid the US-Iran standoff over the Strait of Hormuz. Adding to this, Yemen’s Iran-backed Houthi militant group claimed to have targeted eight oil tankers since declaring a maritime blockade on Saudi shipping in late July, raising the risk of a broader regional conflict and further supporting the black liquid. This, in turn, is seen as underpinning the commodity-linked Loonie, which, along with a broadly weaker US Dollar (USD), continues to exert downward pressure on the USD/CAD pair.

The US inflation data released last week pointed to signs of easing price pressures, undermining prospects for an immediate rate hike by the US Federal Reserve (Fed). In fact, traders are currently pricing in a greater chance that the US central bank will keep rates steady at its September policy meeting. This, in turn, keeps the USD Index (DXY), which tracks the Greenback against a basket of currencies, depressed near its lowest level since May 14, set on Thursday. However, inflation risks stemming from higher oil prices keep Fed rate hike bets on the table and help limit further losses for the USD.

Moreover, Minutes of the July 28-29 FOMC meeting, released on Wednesday, revealed that Fed officials indicated the need to raise interest rates soon unless there was more progress on bringing down inflation. This might hold back USD bears from placing fresh bets and lend some support to the USD/CAD pair. Traders now look forward to the release of monthly Canadian Retail Sales data and the flash US PMIs for some impetus heading into the weekend. Apart from this, the incoming geopolitical headlines might continue to infuse some volatility and produce short-term opportunities.