Firmer Oil supports Canadian Dollar as traders turn their attention to inflation data

• Firmer Oil prices support the Canadian Dollar as USD/CAD retreats from recent highs.
• Expectations of a Fed rate hike limit the pair's losses as the US Dollar holds near a 19-month high.
• Canadian CPI release comes into focus ahead of the BoC's December rate decision.

A recovery in Oil prices is helping the Canadian Dollar (CAD) outperform its major peers on Friday, with USD/CAD's three-day run of gains coming to a halt. However, the pair's losses remain limited as an increasingly hawkish outlook for the Federal Reserve (Fed) underpins broad US Dollar (USD) strength.

A second consecutive weekly advance remains in prospect for USD/CAD, which is trading around 1.4248 at the time of writing, close to a one-month high. Meanwhile, the US Dollar Index (DXY), a measure of the Greenback against six major currencies, stands near 103.33, its strongest level in 19 months.

The Canadian Dollar's sensitivity to Oil price movements reflects Canada's position as a major crude exporter. Crude has rebounded from recent lows following remarks on Thursday by US President Donald Trump, who said Washington did not need an agreement with Iran to end the war.

The risk that higher energy costs will sustain elevated inflation across major economies remains a concern. At its October meeting, the Bank of Canada (BoC) increased its policy rate by 25 basis points (bps) to 2.50%. Explaining the move, the Governing Council said it was necessary “to reduce the risk that continuing high energy prices spread broadly to the prices of other goods and services.” Attention now turns to Monday's Canadian Consumer Price Index (CPI) release, as traders seek further indications of whether the BoC will deliver another rate increase in December.

Further policy tightening is anticipated by economists at RBC Economics, who say the BoC "is expected to hike three more times." The RBC forecast is for "another 25-basis-point increase in December and two additional hikes by mid-2027, bringing the overnight rate to 3.25%, provided the economy continues to improve."

October's US headline Producer Price Index (PPI) increased by 0.3% MoM, falling short of the 0.4% forecast and slowing from September's 1.4% rise. The figures, published earlier in the day, prompted little market response. On an annual basis, producer inflation accelerated from 6.3% to 6.5%, marginally below expectations of 6.6%. Both core PPI readings matched forecasts, with increases of 0.3% MoM and 5.0% YoY.

A December rate increase of 25 bps is fully priced in by traders, according to the CME FedWatch Tool, while the probability of a larger 50 bps rise stands at 10%. A further increase is also expected in January.

The course of interest rates will depend on inflation, Chicago Fed President Austan Goolsbee said on Friday, adding that the Fed still “has work to do.” His remarks followed a call earlier this week from Dallas Fed President Lorie Logan for “at least two more 25-basis-point rate increases.”