• USD/CAD hovers near one-month highs as geopolitical uncertainty keeps the US Dollar firmly supported.
• Traders continue to assess the inflationary impact of rising Oil prices tied to the Middle East conflict.
• Fears of prolonged disruptions through the Strait of Hormuz keep Oil prices elevated and limit deeper losses in the Canadian Dollar.

USD/CAD trades with a mild upside bias on Wednesday, supported by a firmer US Dollar (USD), while a modest pullback in Crude Oil prices weighs slightly on the commodity-linked Canadian Dollar (CAD). At the time of writing, the pair is trading around 1.3760, hovering near one-month highs.

Trading conditions remain relatively calm on Wednesday as investors continue to monitor developments surrounding the US-Iran war, while bracing for the possibility of renewed military strikes after both sides exchanged fresh threats.

US President Donald Trump said on Tuesday that military action against Iran could still resume if talks fail, adding that “we may have to give Iran another hit” and giving Tehran “two to three days” to reach a deal. Meanwhile, Iran warned that the war could spread far beyond the Middle East if the United States and Israel resume their attacks.

This backdrop keeps the US Dollar firmly supported, with the US Dollar Index (DXY), which tracks the Greenback's value against a basket of six major currencies, trading around 99.39 near six-week highs.

However, fears of prolonged supply disruptions through the Strait of Hormuz continue to keep energy markets on edge, keeping Oil prices elevated and limiting stronger upside moves in USD/CAD.

Meanwhile, rising Oil prices continue to stoke inflationary pressures, adding pressure on major central banks to keep interest rates elevated or raise borrowing costs further. In the United States, inflation accelerated sharply in April, leading traders to increasingly price in the possibility of a Federal Reserve (Fed) rate hike by year-end.

In contrast, Canadian inflation data released on Tuesday surprised to the downside, reinforcing expectations that underlying inflation remains relatively contained near the Bank of Canada’s (BoC) 2% target. The softer data also reduced expectations of near-term interest rate hikes from the BoC, adding further pressure on the Canadian Dollar.