Divergent Fed minutes, Williams downplaying inflation, and Middle East tensions—three variables combined to put pressure on the USD/CAD exchange rate.
2026-07-10 13:47:34
On Friday (July 10) during the Asian session, the US dollar continued to weaken against the Canadian dollar, once touching a new low since June 24 at 1.4135, and is currently trading around 1.4160.
The core driver of the dollar's weakness stems from a market reassessment of the Federal Reserve's policy path. The minutes of the Fed's June 16-17 meeting revealed growing concerns among policymakers about high inflation, with a "minority participant" believing there was already a reason to raise interest rates at the June meeting. However, New York Fed President Williams' remarks on Thursday downplayed this hawkish expectation—he stated that even if conflict reignites in the Middle East, he does not believe energy prices will continue to rise for the remainder of the year.
Williams' dovish remarks, coupled with the statement in the meeting minutes that "many participants believed that interest rates would remain unchanged or slightly below current levels by the end of the year," led to a decline in market expectations for a Fed rate hike in the near term.
The FedWatch tool shows that the probability of a rate hike at the July meeting has fallen from 31% to 24.6%. Even though the probability of a rate hike at the September meeting remains at 62.3%, it has declined from 66.6% on Wednesday. This marginal cooling of market expectations for a Fed rate hike is eroding the dollar's interest rate advantage, which is the core driver of the dollar's weakness against the Canadian dollar.
It's worth noting that the current decline in interest rate hike expectations is not a trend reversal—the 24.6% probability of a July rate hike is still higher than the 18.2% a week ago, and the 62.3% probability of a September rate hike is also higher than the 54.1% a week ago. This indicates that the market is still pricing in the possibility of a Fed rate hike this year, albeit with some marginal adjustments. The downside potential for the dollar may therefore be limited.
Geopolitical tensions in the Strait of Hormuz remain a key factor driving up oil prices. On Thursday evening, Iranian officials and media reported explosions in several areas of the country's south, including near the Bushehr nuclear facility—a development following the US military strikes against Iran and Iran's missile launches at US bases in Jordan. This continued geopolitical tension has exacerbated market concerns about potential energy supply disruptions.
For the Canadian dollar, the continued high oil prices provide a direct positive impact. As a major oil exporter, Canada typically benefits from higher oil prices through improved terms of trade. With shipping in the Strait of Hormuz still disrupted and the US-Iran military conflict ongoing, the risk premium for oil prices is likely to remain high, thus providing sustained support for the Canadian dollar.
While the market focus this week has been primarily on the US, expectations surrounding the Bank of Canada's own monetary policy are also providing support for the Canadian dollar. Previously, the market's pricing in a Bank of Canada rate hike this year had jumped from 40% to 60%—an expectation that, while fluctuating recently, remains relatively high.
If the Bank of Canada does indeed raise interest rates this year, it will further narrow the US-Canada interest rate differential, thus benefiting the Canadian dollar. Compared to the marginal cooling of expectations for a Federal Reserve rate hike, the relative stability of expectations for a Bank of Canada rate hike constitutes a structural advantage for the Canadian dollar.
In summary, the USD/CAD pair found short-term support around 1.4145, but the downtrend remains intact. If expectations of a Fed rate hike continue to cool, coupled with persistently high geopolitical risks pushing up oil prices, the exchange rate may further test the 1.4100 level.
On the downside, 1.4100 is a key support level in the near term; a break below this level could open up space towards 1.4050. On the upside risks, if next week's US CPI data is stronger than expected, it could reignite expectations of a Fed rate hike, thereby reversing the current weakness of the US dollar. Furthermore, if the US-Iran situation unexpectedly eases, a drop in oil prices would weaken a significant support level for the Canadian dollar.
In the current environment, the Canadian dollar's performance will continue to be highly dependent on the divergence in global central bank policies—particularly the difference in interest rate hike expectations between the Federal Reserve and the Bank of Canada—and the ongoing impact of Middle East geopolitical tensions on oil prices.
(USD/CAD daily chart, source: EasyForex)
At 13:47 Beijing time on July 10, the USD/CAD exchange rate was 1.4162/63.
The dollar weakened as expectations for a Fed rate hike cooled.
The core driver of the dollar's weakness stems from a market reassessment of the Federal Reserve's policy path. The minutes of the Fed's June 16-17 meeting revealed growing concerns among policymakers about high inflation, with a "minority participant" believing there was already a reason to raise interest rates at the June meeting. However, New York Fed President Williams' remarks on Thursday downplayed this hawkish expectation—he stated that even if conflict reignites in the Middle East, he does not believe energy prices will continue to rise for the remainder of the year.
Williams' dovish remarks, coupled with the statement in the meeting minutes that "many participants believed that interest rates would remain unchanged or slightly below current levels by the end of the year," led to a decline in market expectations for a Fed rate hike in the near term.
The FedWatch tool shows that the probability of a rate hike at the July meeting has fallen from 31% to 24.6%. Even though the probability of a rate hike at the September meeting remains at 62.3%, it has declined from 66.6% on Wednesday. This marginal cooling of market expectations for a Fed rate hike is eroding the dollar's interest rate advantage, which is the core driver of the dollar's weakness against the Canadian dollar.
It's worth noting that the current decline in interest rate hike expectations is not a trend reversal—the 24.6% probability of a July rate hike is still higher than the 18.2% a week ago, and the 62.3% probability of a September rate hike is also higher than the 54.1% a week ago. This indicates that the market is still pricing in the possibility of a Fed rate hike this year, albeit with some marginal adjustments. The downside potential for the dollar may therefore be limited.
Geopolitics: Tensions continue in Iran, high oil prices support the Canadian dollar.
Geopolitical tensions in the Strait of Hormuz remain a key factor driving up oil prices. On Thursday evening, Iranian officials and media reported explosions in several areas of the country's south, including near the Bushehr nuclear facility—a development following the US military strikes against Iran and Iran's missile launches at US bases in Jordan. This continued geopolitical tension has exacerbated market concerns about potential energy supply disruptions.
For the Canadian dollar, the continued high oil prices provide a direct positive impact. As a major oil exporter, Canada typically benefits from higher oil prices through improved terms of trade. With shipping in the Strait of Hormuz still disrupted and the US-Iran military conflict ongoing, the risk premium for oil prices is likely to remain high, thus providing sustained support for the Canadian dollar.
Bank of Canada: Rate hike expectations still constitute a medium-term positive factor.
While the market focus this week has been primarily on the US, expectations surrounding the Bank of Canada's own monetary policy are also providing support for the Canadian dollar. Previously, the market's pricing in a Bank of Canada rate hike this year had jumped from 40% to 60%—an expectation that, while fluctuating recently, remains relatively high.
If the Bank of Canada does indeed raise interest rates this year, it will further narrow the US-Canada interest rate differential, thus benefiting the Canadian dollar. Compared to the marginal cooling of expectations for a Federal Reserve rate hike, the relative stability of expectations for a Bank of Canada rate hike constitutes a structural advantage for the Canadian dollar.
Outlook: Short-term bias is towards further strengthening, but data risks should be noted.
In summary, the USD/CAD pair found short-term support around 1.4145, but the downtrend remains intact. If expectations of a Fed rate hike continue to cool, coupled with persistently high geopolitical risks pushing up oil prices, the exchange rate may further test the 1.4100 level.
On the downside, 1.4100 is a key support level in the near term; a break below this level could open up space towards 1.4050. On the upside risks, if next week's US CPI data is stronger than expected, it could reignite expectations of a Fed rate hike, thereby reversing the current weakness of the US dollar. Furthermore, if the US-Iran situation unexpectedly eases, a drop in oil prices would weaken a significant support level for the Canadian dollar.
In the current environment, the Canadian dollar's performance will continue to be highly dependent on the divergence in global central bank policies—particularly the difference in interest rate hike expectations between the Federal Reserve and the Bank of Canada—and the ongoing impact of Middle East geopolitical tensions on oil prices.
(USD/CAD daily chart, source: EasyForex)
At 13:47 Beijing time on July 10, the USD/CAD exchange rate was 1.4162/63.
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