USD/CAD traded with an upward bias above the mid-1.3700s in Asia on Monday, but stayed below the one-month high reached last Friday. Demand for the US dollar supported the pair, while rising crude oil prices supported the Canadian dollar and limited gains.
On Sunday, US President Donald Trump posted on Truth Social warning Iran that the “clock is ticking” and that there “won’t be anything left” if action is not taken soon, adding that “time is of the essence.” The Times of Israel also reported that Israel and the US are advancing military preparations to possibly resume coordinated attacks against Iran.
These developments increased concerns about wider Middle East tensions and disruption linked to the Strait of Hormuz, pushing crude oil to a two-week high. Higher energy prices added to inflation concerns and fed expectations of tighter US monetary policy.
CME Group’s FedWatch Tool shows traders pricing in over a 50% chance of a Fed rate hike by the end of this year. Geopolitical risk also lifted the safe-haven US dollar to its highest level since April 7.
No major US or Canadian data releases are due on Monday. Markets may stay volatile as headlines influence oil prices and the US dollar, shaping near-term moves in USD/CAD.
We remember the Mideast tensions in 2025, when geopolitical risks and hawkish Fed expectations pushed the USD/CAD pair above the 1.3700 mark. Today, on May 18, 2026, the environment has shifted, with the pair trading closer to 1.3550 despite renewed supply concerns keeping WTI crude elevated near $92 a barrel. This divergence from last year’s direct correlation presents a new landscape for derivatives.
The sustained strength in oil, which we saw push WTI above $105 a barrel during the 2025 Strait of Hormuz scare, is once again providing a fundamental floor for the commodity-linked Loonie. This is capping the upside for USD/CAD, particularly as Canada’s latest CPI reading came in at 2.5%, just below the 2.7% market consensus. A softer inflation print gives the Bank of Canada less reason to tighten policy, creating a complex outlook for the CAD.
Unlike the aggressive Federal Reserve sentiment we saw through 2025, the current market dynamic has completely inverted. We now see the CME FedWatch Tool pricing in a 70% probability of a 25 basis point rate cut by September 2026, a stark reversal from last year’s expectations for hikes. This pivot is weighing on the US Dollar’s long-term appeal as a high-yielding currency.
This creates a tense setup where a strong, oil-supported CAD is fighting a USD facing potential rate cuts. We anticipate this could lead to choppy, range-bound trading with spikes in volatility, rather than the clear upward trend seen in parts of 2025. Traders could therefore consider strategies that profit from this environment, such as selling out-of-the-money options strangles to collect premium or buying straddles ahead of upcoming US inflation data.
