Firmer Oil supports Canadian Dollar as inflation data comes into focus

• USD/CAD retreats from recent peaks as stronger oil prices support the Canadian Dollar.
• 19-month high remains in reach for the US Dollar as Fed rate hike expectations limit USD/CAD losses.
• December BoC rate outlook in focus as traders look to Canadian CPI.

A three-day advance in USD/CAD stalls on Friday. Recovering oil prices are helping the Canadian Dollar (CAD) outpace its major peers. However, broad US Dollar (USD) strength is limiting the pair’s losses as expectations for the Federal Reserve (Fed) turn increasingly hawkish.

1.4248 is the approximate level for USD/CAD at the time of writing. The pair is close to a one-month high and heading for a second consecutive weekly gain. Meanwhile, the US Dollar Index (DXY) stands near 103.33, its highest reading in 19 months. The index measures the Greenback against six major currencies.

Oil prices have rebounded from recent lows following remarks on Thursday by US President Donald Trump that Washington did not need an agreement with Iran to end the war. As Canada is a major crude exporter, movements in oil prices influence the Canadian Dollar.

The risk that higher energy costs will prolong elevated inflation across major economies remains in focus. 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.” Monday’s Canadian Consumer Price Index (CPI) release is now the focus for traders seeking indications of whether another BoC rate increase will follow in December.

Further policy tightening is expected by economists at RBC Economics, who say the BoC "is expected to hike three more times." The path projected by RBC includes "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."

US markets showed little response to Producer Price Index (PPI) figures published earlier in the day. October headline PPI increased 0.3% MoM, slowing from September’s 1.4% and undershooting 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 increase of 25 bps is fully priced in by traders, according to the CME FedWatch Tool. Pricing also indicates a 10% probability of a larger 50 bps rise, while traders anticipate a further rate 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.”