Canadian Dollar struggles near April 2025 lows vs bullish USD amid Iran uncertainty

The USD/CAD pair kicks off the new week on a positive note and trades near the 1.4170-1.4175 region during the Asian session, close to its highest level since April 2025, set last Friday.

The US Dollar (USD) stalls its modest pullback from the highest level since May 2025 amid fresh geopolitical developments over the weekend, and remains a key tailwind for the USD/CAD pair. Iran accused the US and Israel of violating the ceasefire and closed the Strait of Hormuz again in the face of continued Israeli strikes in Lebanon. Adding to this, reports suggest that Iranian negotiators suspended high-stakes talks with the US in response to a flurry of verbal threats by US President Donald Trump to strike Iran again. This, in turn, dents investors' appetite for riskier assets and supports the safe-haven buck.

The Canadian Dollar (CAD), on the other hand, continues with its relative underperformance in the wake of slowing economic growth and the Bank of Canada's (BoC) dovish policy stance compared to the US Federal Reserve (Fed). In fact, investors expect the BoC to hold rates steady through late 2026 as policymakers are prioritizing a sluggish economy over inflation threats. In contrast, the Fed's latest projection indicates that rates could rise to 3.8% by year-end, signaling a 25-basis-point (bps) rate hike in the coming months. The divergent Fed-BoC policy expectations turn out to be another factor pushing the USD/CAD pair higher.

Meanwhile, Crude Oil prices rise around 2% amid concerns about a fragile interim peace agreement between the US and Iran. This might hold back traders from placing aggressive bearish bets around the commodity-linked Loonie as the market focus now shifts to the release of the latest Canadian consumer inflation figures, due later this Monday. This, in turn, acts as a headwind for the USD/CAD pair, though the aforementioned fundamental backdrop suggests that the path of least resistance for spot prices remains to the upside. Hence, any corrective pullback might still be seen as a buying opportunity and is more likely to remain limited.