Firmer Oil supports Canadian Dollar as traders await inflation data

• Firmer Oil prices lend support to the Canadian Dollar, pulling USD/CAD back from its recent highs.
• USD/CAD's losses remain limited as expectations of a Fed rate hike hold the US Dollar close to a 19-month high.
• The BoC's December rate decision is in focus as traders look to Canadian CPI data for guidance.

The Canadian Dollar (CAD) outperforms its major peers on Friday, supported by recovering Oil prices, while USD/CAD breaks a three-day winning streak. However, broad US Dollar (USD) strength limits the pair’s losses as expectations for Federal Reserve (Fed) policy turn increasingly hawkish.

A second consecutive weekly gain remains in sight 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) stands near 103.33, a 19-month high. The index measures the Greenback against six major currencies.

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

The risk of persistently high inflation across major economies has increased with the rise in energy prices. At its October meeting, the Bank of Canada (BoC) lifted 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 for further indications of whether the BoC will deliver another rate increase in December.

Further policy tightening is anticipated by economists at RBC Economics, who note that the BoC "is expected to hike three more times." Their forecast calls 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."

Markets showed little response to US Producer Price Index (PPI) figures published earlier in the day. October’s headline PPI increased 0.3% MoM, slowing from 1.4% in September and falling short of the 0.4% forecast. On an annual basis, producer inflation accelerated from 6.3% to 6.5%, marginally below expectations of 6.6%. Core PPI matched forecasts, rising 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%. Market expectations also point to a further increase in January.

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