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Rabobank analysts Molly Schwartz and Christian Lawrence highlight that escalating geopolitical tensions from the Iran conflict have bolstered safe-haven demand for the US Dollar, providing support to the USD/CAD pair despite a projected narrowing of the US-Canada interest rate differential to 75 basis points by 2026. The analysts note that while the rate differential typically drives USD/CAD, current geopolitical risks are acting as a counterbalance, maintaining the pair's stability in a sideways range. This dynamic suggests that USD/CAD may remain range-bound as both factors—geopolitical support and narrowing rates—offset each other. For traders, this scenario implies limited directional bias in USD/CAD, making it a candidate for range-trading strategies. The safe-haven demand for the Dollar could attract risk-averse investors during periods of heightened global uncertainty, while the narrowing rate differential might cap long-term upside potential. Market participants should monitor developments in the Iran situation and central bank policy cues from the Fed and Bank of Canada for potential shifts in momentum. Looking ahead, the key focus for forex markets will be on how geopolitical risks evolve alongside monetary policy divergence. If the Iran conflict escalates further, USD/CAD could see stronger support. Conversely, if rate differentials widen unexpectedly, the pair might face upward pressure. Traders should also watch for technical breakdowns or breakouts in the current range, which could signal a shift in market sentiment.
