USD/CAD eyes downside to near 1.3600 as oil rallies on Middle East tensions

• USD/CAD is exposed to more downside as higher oil prices strengthen the Canadian Dollar.
• Fed Bowman reiterated this weekend that further policy tightening is appropriate.
• Canada’s upbeat labor market data has prompted hawkish BoC bets.

The USD/CAD pair sets for a breakdown to near the round-level support of 1.3600 as deepening Middle East tensions due to Israel-Hamas bellicose has ramped up global oil prices. The Loonie asset has been exposed to more downside as the oil price rally has strengthened the Canadian Dollar.

S&P500 futures have generated losses in the early New York session as geopolitical tensions have dampened market sentiment. The appeal for the US Dollar improves significantly as investors rush for safe-haven assets amid a highly volatile environment.

The US Dollar Index (DXY) recovers to near 106.60 but struggles to extend the upside. The broader USD Index outlook is bullish due to the collective effort of risk-off impulse and rising odds of one more interest rate increase prompted by strong labor demand and decent wage growth.  

Fed Governor Michelle Bowman reiterated this weekend that further policy-tightening by the central bank is appropriate. She is willing to support one more interest rate hike at a future policy meeting if incoming data conveys that progress in inflation easing to 2% has stalled.

On the Canadian Dollar front, upbeat labor market data for September improved odds of an interest rate hike from the Bank of Canada (BoC). Canadian employers hired 63.8K job-seekers in September, significantly higher than expectations of 20K and the former release of 39.9K. The Unemployment Rate remained steady at 5.5% while investors anticipated nominally higher at 5.6%. The annual wage rate accelerated to 5.3% against the former release of 5.2%.