The Canadian Dollar stays supported by broad US Dollar weakness, but upside momentum appears limited.

USD/CAD ticks lower on Thursday but struggles to extend its decline as traders navigate a mix of conflicting market signals. Stronger crude oil prices continue to support the Canadian Dollar, while a slight pullback in the US Dollar helps limit the pair’s upside. However, ongoing geopolitical uncertainties and contrasting monetary policy outlooks between the Federal Reserve and the Bank of Canada provide underlying support to USD/CAD.

The USD/CAD pair is struggling to build on its rebound from the 1.3900 area, a level that marked this week’s low, and is edging lower during Thursday’s Asian trading session. Despite the pullback, the pair remains close to Tuesday’s year-to-date peak, hovering just below the mid-1.3900s and posting a modest daily loss of less than 0.10% as investors weigh conflicting market drivers.

The Canadian Dollar finds support from rising crude oil prices after Iran announced the closure of the Strait of Hormuz in response to a new wave of US military strikes ordered by President Donald Trump. The geopolitical escalation has helped oil recover from Tuesday’s near two-month low, strengthening the commodity-linked Loonie. A softer US Dollar is also contributing to downside pressure on USD/CAD.

At the same time, escalating tensions between Washington and Tehran continue to underpin demand for the US Dollar as a safe-haven asset. Iran’s joint military command has vowed a “decisive and crushing” response to any US aggression in the region, heightening concerns over a broader conflict. Additionally, the surge in energy prices is reinforcing inflation fears and supporting expectations that the US Federal Reserve could maintain a more hawkish policy stance.

Market participants are now pricing in more than a 70% probability of a Fed rate increase before year-end, according to CME FedWatch data. Those expectations gained momentum after US inflation data showed the Consumer Price Index rising 4.2% year-over-year in May, the highest reading in three years. In contrast, the Bank of Canada remains relatively dovish, with policymakers placing greater emphasis on supporting economic growth despite inflation risks.

The policy divergence between the Fed and the BoC is likely to provide a floor for USD/CAD and may limit the pair’s downside potential. As a result, traders may prefer to wait for stronger selling momentum before concluding that the recent uptrend has ended. Attention now shifts to the upcoming US Producer Price Index release, while developments in the Middle East and movements in oil prices are expected to remain key drivers of market sentiment.