USD/CAD rises to near 1.3480 as risk aversion emerges on escalated situation in Red Sea

• USD/CAD gains ground as investors turned back to the US Dollar.
• WTI price could rise on the escalated situation in the Red Sea; supporting CAD.
• BoC’s Business Outlook Survey Results showed that inflation could persist above the 2.0% target.

USD/CAD moves on a winning streak for the fourth consecutive session, with positive market sentiment turning into risk aversion. This shift is attributed to the heightened geopolitical situation, specifically the reported missile launched by the Islamic Revolutionary Guard Corps (IRGC) targeting espionage centers and gatherings of anti-Iranian terrorist groups in northern Iraq near the US Consulate in Erbil. As a result, the USD/CAD pair trades higher around 1.3480 during the early European hours on Tuesday.

West Texas Intermediate (WTI) price struggles to retrace its recent losses, trading near $72.50 per barrel at the time of writing. The reported attacks by the IRGC, coinciding with concerns over Israel's offensive in the Gaza Strip and an escalation in the Red Sea by Iran-backed Houthi rebels, have contributed to supporting Crude oil prices. This development might have limited the losses of the Canadian Dollar (CAD) against the US Dollar (USD).

The Bank of Canada's (BoC) Business Outlook Survey Results on Monday indicated that softer demand and renewed competitive pressures are gradually exerting downward pressure on growth in output prices. While concerns about labor shortages are diminishing, wage growth is anticipated to ease only gradually. Due to this gradual easing, businesses expect inflation to persist above the Bank of Canada's 2.0% target for an extended period.

Statistics Canada is set to publish the Consumer Price Index (CPI) for December. The annual increase is expected to be 3.4%, slightly higher than the 3.1% recorded in November. On a monthly basis, the index is anticipated to decline by 0.3%, following a 0.1% increase in the previous month. These figures will provide insights into the country's inflationary trends and could impact market sentiments and BoC’s policy considerations.

The US Dollar Index (DXY) experiences upward support due to risk aversion, further reinforced by positive movements in US Treasury yields. Market participants will keenly observe the US NY Empire State Manufacturing Index for January and a speech by Federal Reserve official Christopher J. Waller scheduled for later on Tuesday.