• The Canadian Dollar benefits from the rebound in Oil prices amid heightened geopolitical tensions.
• Solid US economic indicators continue to provide underlying support to the US Dollar.
• Markets await the US December Industrial Production data and further comments from US policymakers.

USD/CAD trades flat around 1.3900 on Friday at the time of writing, virtually unchanged on the day. The pair’s hesitation is mainly driven by a stronger Canadian Dollar (CAD), supported by the rebound in Oil prices, while the US Dollar (USD) remains firm in the wake of strong US data sets.

The Canadian Dollar finds support from rising geopolitical tensions. According to Reuters, Ukraine has stepped up attacks on Russian oil tankers, with at least six vessels targeted by drones and missiles in the Baltic Sea. This development has increased concerns over global Crude Oil supply and lifted prices, which generally tends to support the Canadian Dollar. The positive correlation between energy prices and the Canadian currency therefore remains a key driver for the Loonie in the near term.

Meanwhile, the US Dollar continues to draw support from solid fundamentals. Recent signs of resilience in the US labor market, combined with robust Retail Sales data released earlier this week, reinforce the view that the Federal Reserve (Fed) could keep interest rates unchanged for several more months.

Several Fed officials have also adopted a cautious tone. Chicago Fed President Austan Goolsbee noted that, despite clear evidence of stability in the labor market, the central bank should remain focused on bringing inflation down. At the same time, San Francisco Fed President Mary Daly said that monetary policy is currently “in a good place” to respond to changes in economic conditions.

Recent US data support this narrative. Weekly Initial Jobless Claims released by the US Department of Labor declined to 198,000 for the week ending January 10, from 207,000 previously, marking the lowest level since November and easing some concerns about labor market deterioration. In the manufacturing sector, the New York Empire State Manufacturing Index rebounded to 7.7 in January after contracting in December, while the Philadelphia Fed Manufacturing Survey jumped sharply to 12.6, well above expectations, highlighting a strong start to the year for industrial activity.

Going forward, the direction of USD/CAD will likely depend on the balance between Oil-driven support for the Canadian Dollar and the continued strength of US fundamentals, as investors await fresh macroeconomic releases and further guidance from Fed officials.