Canadian Dollar trims gains as US-Iran tensions and hawkish Fed outlook support US Dollar

The Canadian Dollar (CAD) trims part of its intraday gains on Friday as uncertainty surrounding a final US-Iran peace agreement and expectations of a hawkish Federal Reserve (Fed) help the US Dollar (USD) recover some of its losses after coming under pressure from Thursday's broadly in-line US Personal Consumption Expenditures (PCE) report.

At the time of writing, USD/CAD trades around 1.1491, near levels last seen in April 2025. The pair remains on track for a fourth straight weekly advance.

US President Donald Trump said on Truth Social that Iran had launched "at least four one-way attack drones" at ships transiting the Strait of Hormuz, calling the incident "a foolish violation of our ceasefire agreement."

The United States and Iran reached a 60-day Memorandum of Understanding (MoU) earlier this month, but the latest round of talks showed that differences remain over inspections of Iran's nuclear program and the future management of the Strait of Hormuz.

On the monetary policy front, the latest US PCE data showed that core inflation remained relatively contained, suggesting that the Fed may remain patient on rate hikes. Still, the acceleration in headline inflation supports the view that the Fed could raise interest rates later this year.

The US Dollar Index (DXY), which tracks the Greenback's value against a basket of six major currencies, trades around 101.35 after hitting a more than one-year high near 101.80 earlier this week.

Traders are currently pricing in a 60% chance of a September Fed rate hike, down from 70% a week ago, according to the CME FedWatch Tool.

Minneapolis Fed President Neel Kashkari said on Friday, "I have one rate hike penciled in for 2026," adding, "I see rates on hold in 2027." Kashkari also said, "I am concerned about inflation, especially in services."

Meanwhile, lower Oil prices as shipping through the Strait of Hormuz gradually improves are capping gains in the commodity-linked Loonie, given Canada's status as a major crude exporter. West Texas Intermediate (WTI) crude trades around $69.20, its lowest level since early March and down roughly 9.5% this week.

Attention now turns to next week's economic calendar, including Canada's April Gross Domestic Product (GDP) report, the US Nonfarm Payrolls (NFP) report, and speeches from Federal Reserve Chair Kevin Warsh and Bank of Canada Governor Tiff Macklem.