• USD/CAD rises as the US Dollar gains on safe-haven support amid uncertainty over the US-Iran peace deal.
• CME FedWatch tool suggests a 40.2% chance of a year-end Fed rate hike due to persistent inflation concerns.
• A dovish economic outlook has significantly weakened the Canadian Dollar.

USD/CAD extends its gains for the second successive day, trading around 1.3810 during the early European hours on Monday. The pair appreciates as the US Dollar (USD) holds ground on increased safe-haven demand amid US-Iran peace uncertainty. The US ISM Manufacturing Purchasing Managers Index (PMI) report will be published later on Monday.

The geopolitical landscape remains fluid as diplomatic channels between Washington and Tehran experience ongoing activity. Iranian Foreign Minister Abbas Araghchi confirmed that talks and message exchanges with the United States are currently underway. However, Araghchi maintained a cautious stance, emphasizing that it remains impossible to properly evaluate the trajectory of these negotiations until a definitive and clear outcome is officially reached.

Adding momentum to these diplomatic efforts, US President Donald Trump has requested specific revisions to the proposed US-Iran deal. The agreement, which aims to permanently halt the hostilities that erupted earlier this year, is now facing adjustments centered on key security and non-proliferation issues. Specifically, the requested modifications focus on the strategic transit dynamics of the Strait of Hormuz and the management and removal of Iran's highly enriched uranium supplies.

Simultaneously, global financial markets are navigating shifting expectations for central bank policies. In the United States, macroeconomic sentiment has adjusted to factor in a tighter monetary environment for a bit longer. According to the CME FedWatch tool, traders are now pricing in a 40.2% probability that the Federal Reserve will implement a 25-basis-point interest rate hike before the year concludes, reflecting lingering caution over inflation and economic resilience.

In contrast, the Canadian economic outlook has taken a decidedly dovish turn, prompting a notable softening of the Canadian Dollar (CAD). Fresh economic data indicated that Canada’s economy unexpectedly contracted in the first quarter of 2026 relative to the previous year. Because this represents the second consecutive quarter of annual decline, the data highlights a clear loss of domestic momentum, which subsequently pushed the USD/CAD currency pair higher as the CAD lost ground.

This economic slowdown is further underscored by a sharp cooling in consumer prices across Canada. The BoC’s preferred core inflation metrics have slowed more than economists anticipated, touching their lowest levels in five years and signaling that underlying price pressures outside of the volatile energy sector are successfully easing. This cooling trend has firmly validated the central bank’s perspective that energy-driven inflation spikes may only be temporary. Consequently, the data has wiped out expectations for any near-term rate hikes, leaving market participants overwhelmingly confident that the Bank of Canada will hold interest rates steady at its upcoming policy meeting on June 10.