• USD/CAD remains on the defensive, though the downside seems limited amid fundamental cues.
• Bullish oil prices underpin the Loonie, while US-Iran tensions and Fed hike bets support the USD.
• Traders now look forward to the second-tier US economic data to grab short-term opportunities.

The USD/CAD pair struggles to capitalize on the overnight bounce from the vicinity of the 1.4000 psychological mark, or a one-month low, and attracts some sellers during the Asian session on Friday. Spot prices currently trade around the 1.4035 region, though the downside remains cushioned amid mixed fundamental cues.

Crude oil prices hold steady near a one-month high, touched earlier this week, amid escalating US-Iran tensions and worries about energy supply disruptions. This, to a large extent, offsets the Bank of Canada's (BoC) cautious outlook earlier this week and underpins the commodity-linked Loonie, which acts as a headwind for the USD/CAD pair. Meanwhile, elevated oil prices fuel inflation fears and revive US Federal Reserve (Fed) rate hike bets, which benefits the US Dollar (USD) and limits the downside for the currency pair.

In the latest developments surrounding the Middle East crisis, the US carried out a sixth consecutive night of air strikes against Iran and expanded its military campaign beyond conventional military targets. In fact, officials in southern Iran's Bandar Abbas reported that civilian infrastructure – including power facilities and a train station – has been hit. Iran responded by attacking US military facilities across the region. This raises fears of a return to all-out war and keeps the geopolitical risk premium in play, benefiting the safe-haven Greenback.

Meanwhile, Iran's Islamic Revolutionary Guard Corps had threatened to expand the conflict by targeting additional regional energy supply routes. In fact, Reuters reported that Iran has asked Yemen’s Houthis to stand ready to close the Red Sea oil route. This, along with the US blockade of Iranian ports and the closure of the Strait of Hormuz, supports oil prices. Investors seem convinced that energy-driven inflationary pressures will force the US central bank to stick to its hawkish stance, which favors the USD bulls and supports the USD/CAD pair.

Traders now look forward to Friday's US economic docket – featuring Building Permits, Housing Starts, Industrial Production data, and the prelim University of Michigan Consumer Sentiment Index and Inflation Expectations. This, along with speeches from influential FOMC members, will drive the USD demand and provide some impetus to the USD/CAD pair. Nevertheless, spot prices remain on track to register heavy weekly losses, though the aforementioned fundamental backdrop warrants caution before positioning for any further depreciating move.