A sharp rebound in oil prices, driven by renewed geopolitical tensions in the Middle East, has strengthened the Canadian Dollar (CAD) and supported the British Pound (GBP) and US Dollar (USD) in Wednesday's trading session. The USD/CAD pair traded around 1.4190, down 0.10% on the day, as the CAD benefited from the oil rally following US President Donald Trump's announcement that the memorandum of understanding with Iran is 'over' and that the US could launch new strikes against Iran, potentially targeting strategic infrastructure such as Kharg Island, Iran's main oil export terminal [1]. The Strait of Hormuz, which handles about one-fifth of the world's oil supply, remains a focal point for investors due to the risk of supply disruptions [1].
The British Pound posted modest gains, with GBP/USD trading at 1.3371, up 0.09%, as geopolitical risks offset dollar strength. Over the past few days, Iran and the US exchanged attacks, including Iran hitting two vessels in the Strait of Hormuz and the US CENTCOM reporting strikes on 80 targets. The US also reimposed sanctions on Iran's oil, and President Trump threatened to resume the blockade in Hormuz [2]. West Texas Intermediate (WTI) crude oil surged nearly 5% to $75.60 on the news [2].
The Canadian Dollar was the strongest against the Japanese Yen among major currencies, and Canada's merchandise trade surplus reached its highest level in four years in May, driven by record exports. However, NBC warned that lower energy prices following the recent oil price correction could narrow the surplus in coming months, and ongoing disruptions in the Strait of Hormuz continue to pose risks to global supply chains [1]. Scotiabank analysts noted that sentiment toward the CAD has improved, and the declining premium for upside USD protection suggests recent CAD weakness may be ending [1].
Market participants are awaiting the release of the June Federal Open Market Committee (FOMC) Minutes, which could provide further clues on the Federal Reserve's monetary policy outlook. In the US, the Dollar Index (DXY) rose 0.10% to 101.19, supported by higher oil prices [2]. Money markets see a 94% chance of a Fed rate hike by 2026 and a 65% chance of a rate hold at the July meeting, according to Prime Terminal data [2]. In Canada, attention is turning to Friday's June employment report, which could influence expectations for the Bank of Canada's next policy decision [1].
In the UK, uncertainty over the selection of a finance minister for the incoming Prime Minister Andy Burnham is keeping investor tensions high, with Polymarkets assigning a 51% probability to Ed Miliband taking the role [2]. The Bank of England's Deputy Governor Sarah Breeden is also scheduled to speak amid a light economic calendar [2].
CONCLUSION
Escalating tensions in the Middle East have triggered a surge in oil prices, strengthening the Canadian Dollar and supporting the Pound and Dollar. Market focus now shifts to upcoming central bank communications and key economic data, which could further influence currency movements. Ongoing geopolitical risks and supply chain concerns remain central to market sentiment.