The US dollar rose for a second straight day on Wednesday (October 28), extending its rebound this week from the 1.3970-1.3965 range (its lowest level since September 16). The pair climbed further above 1.4060 in Asian trading, hitting a one-week high, as traders now focus on key central bank events.

The Bank of Canada is expected to raise interest rates by 25 basis points; the focus is on the Federal Reserve.

The Bank of Canada is scheduled to announce its interest rate decision today, with the market widely betting on a 25 basis point hike to address persistent inflationary pressures and keep pace with the policy moves of major central banks globally. However, the real market focus is not entirely on Ottawa's decision, but rather on the outcome of the two-day Federal Open Market Committee (FOMC) meeting and the potential policy statements from Fed Chairman Kevin Warsh. Investors are closely watching whether the Fed will signal further tightening or provide clearer guidance on its future path. Furthermore, key US macroeconomic data to be released on Thursday—the preliminary Q3 GDP figure and the Personal Consumption Expenditures (PCE) price index—will be crucial, as the market hopes to glean further clues about the Fed's future policy path. The combined impact of these data and the Fed's statements will directly determine the short-term strength of the US dollar, thus providing new trading momentum for the USD/CAD exchange rate and potentially altering the Canadian dollar's performance relative to other currencies.

Fed pricing: Over 80% probability of a December rate hike; energy inflation concerns support the dollar.

Meanwhile, according to CME Group's FedWatch tool, traders have priced in an 80% probability of another interest rate hike by the US Federal Reserve in December. This high probability stems primarily from inflation concerns triggered by recent high energy prices. The market worries that rising energy costs will push up overall price levels directly and indirectly, forcing the Federal Reserve to maintain or even strengthen its tightening stance. Furthermore, the stalled US-Iran negotiations and the latest attacks on Saudi Arabia have kept geopolitical risk premiums persistent and robust. This has fueled risk aversion, helping the US dollar attract buying for the fourth consecutive trading day, becoming the market's preferred safe haven amid uncertainty. The combination of energy inflation and geopolitical risks not only supports the short-term strength of the US dollar but also further reinforces market expectations that the Federal Reserve may take more hawkish action, allowing the dollar to maintain a relative advantage among major currency pairs.

Oil Prices and Geopolitics: Houthi rebels claim to have hit the Saudi Ministry of Defense; rising oil prices may limit currency upside.

However, rising oil prices may support the Canadian dollar, which is highly correlated with commodities, thus creating headwinds for the USD/CAD pair. Bulls should exercise caution when chasing higher prices. According to media reports on Tuesday, the US has informed several Gulf Arab states to prepare for a possible short but intense military operation against Iran following the November 3 midterm elections. Meanwhile, the Iranian-backed Houthi rebels in Yemen claimed responsibility for a ballistic missile strike on the Saudi Arabian Ministry of Defense in Riyadh, asserting a direct hit. The continued stall in US-Iran negotiations has further exacerbated market concerns about a potential escalation of tensions in the Middle East. These events combined to drive oil prices back into the spotlight after a two-day correction following a multi-month high on Friday. The rebound in oil prices not only enhances the Canadian dollar's commodity currency attributes but may also indirectly influence the Federal Reserve's policy pricing by pushing up global inflation expectations, thereby limiting the upside potential of the USD/CAD pair.

Summarize

The USD/CAD pair is poised for a second consecutive day of gains on Wednesday, breaking above 1.4060 in Asian trading to reach a one-week high and extending its rebound from its lows since September 16th. The Bank of Canada is expected to raise interest rates by 25 basis points, but the focus remains on the Federal Reserve's decision and Warsh's comments, as well as Thursday's US Q3 GDP and PCE data. CME FedWatch shows an over 80% probability of a December rate hike. High energy prices fueling inflation concerns, stalled US-Iran negotiations, and the attack on Saudi Arabia have drawn buying interest in the safe-haven dollar for the fourth consecutive day. The US has informed its Gulf allies to prepare for military action against Iran after the midterm elections, and the Houthis claimed to have hit the Saudi Ministry of Defense with a ballistic missile, solidifying the geopolitical risk premium. Rising oil prices could benefit the Canadian dollar, creating headwinds for the USD/CAD pair, requiring caution from bulls. The short-term exchange rate direction depends on the relative signals from the Bank of Canada and Federal Reserve decisions. (USD/CAD daily chart, source: EasyForex) At 13:58 Beijing time, USD/CAD was trading at 1.4065/66.