The USD/CAD pair edged higher during Monday's Asian trading session, with the exchange rate rebounding to around 1.4165, halting a four-day losing streak. As military tensions between the US and Iran escalated, market risk aversion intensified, providing renewed buying support for the US dollar. Meanwhile, the Canadian dollar found support from rising international oil prices and positive domestic economic data, limiting the upside for USD/CAD.

Recent US military strikes on multiple targets within Iran, aimed at degrading Iran's ability to disrupt commercial shipping in the Strait of Hormuz, were followed by Iranian drone and missile attacks on US allies across the Middle East, including Kuwait, Qatar, Bahrain, and Jordan. This has significantly heightened regional tensions. Concurrently, Iran's announcement of the closure of the Strait of Hormuz until further notice has rapidly increased market concerns over the stability of global energy supplies. The strait handles about 20% of the world's seaborne crude oil shipments. Persistent disruptions could keep international oil prices elevated and further push up global inflation expectations. In this environment of rising safe-haven demand, the US dollar, as a traditional haven asset, continues to attract capital, underpinning USD/CAD.

Canadian Dollar Fundamentals Remain Robust

However, the Canadian dollar's fundamentals remain solid. Data from Statistics Canada showed the country added 18,200 jobs in June, surpassing market expectations of 10,000 and continuing the employment growth momentum seen in May. Simultaneously, the unemployment rate fell from 6.6% to 6.5%, beating forecasts and indicating continued resilience in the Canadian labor market. This data alleviated some market concerns about a Canadian economic slowdown and provided support for the loonie.

Monetary Policy Outlook

Regarding monetary policy, markets widely expect the Bank of Canada to hold its overnight rate steady at 2.25% at its policy meeting this week and likely maintain its current policy stance for the foreseeable future. With domestic inflationary pressures generally moderate and economic activity gradually recovering, markets see limited necessity for the BoC to adjust policy in the near term, which also helps stabilize the Canadian dollar.

Focus Shifts to US Inflation Data

Market focus this week will also shift to the US June Consumer Price Index (CPI) data. If US inflation figures come in below market expectations, bets on further Federal Reserve policy tightening could cool, potentially pressuring the US dollar and posing a downside risk for USD/CAD. Conversely, persistently strong inflation could reinforce expectations that the Fed will maintain high interest rates, providing fresh upward momentum for the greenback.

Technical Analysis

From a technical perspective, the USD/CAD daily chart shows signs of stabilization after a period of correction, with the price moving back near its short- and medium-term moving averages. The MACD indicator's green bars continue to shorten, and its lines show signs of forming a golden cross, indicating weakening bearish momentum. The RSI has recovered to near neutral territory, suggesting a short-term improvement in market sentiment. A decisive break above 1.4200 could pave the way for a further test of resistance zones around 1.4250 and 1.4300. Key support levels to watch on the downside are 1.4120, 1.4050, and 1.4000. A break below these areas could open the door for further corrective moves.

On the 4-hour chart, USD/CAD has stopped its decline and begun to recover, with the price moving back above short-term moving averages. The MACD is near the zero line and gradually strengthening, while the RSI has moved above 50, indicating increased short-term buying interest. However, considering the supportive impact of robust Canadian jobs data and rising oil prices on the loonie, the pair may remain range-bound in the near term. A stronger-than-expected US CPI print could propel the pair to break above 1.4200, while weaker data could see USD/CAD retest support near 1.4120.

Key Influencing Factors

The USD/CAD pair is currently influenced by a mix of safe-haven demand and Canadian economic fundamentals. Escalating US-Iran tensions are supporting the US dollar, while continued improvement in Canada's job market and expectations for stable policy from the Bank of Canada are enhancing the loonie's resilience, resulting in an overall consolidation pattern for the exchange rate. Looking ahead, the US June CPI data, the Bank of Canada's rate decision, and developments in the Middle East will remain core factors driving USD/CAD's direction. Persistent US inflation could maintain the dollar's advantage, while cooling inflation coupled with further gains in oil prices could see the Canadian dollar strengthen further.