USD/CAD retreats amid US Dollar weakness, Oil price drop

• USD/CAD retreats to 1.4040, extending its sideways consolidation that has persisted since October 15.
• The budget deadlock in Washington and rising US-China trade tensions weigh on the US Dollar.
• Lower Oil prices, however, limit the Canadian Dollar's upside and help cap the pair's decline.

USD/CAD weakens on Friday, hovering around 1.4040 at the time of writing, extending its sideways consolidation since October 15. The US Dollar (USD) remains under pressure, hit by the ongoing US government shutdown and persistent trade frictions between the United States (US) and China.

The US Senate failed for the tenth time on Thursday to advance the Republican funding bill that would reopen the government. According to the White House, at least 10,000 federal employees could be furloughed, increasing concerns about the economic consequences of the prolonged shutdown.

At the same time, several members of the Federal Reserve (Fed) have recently expressed support for further interest rate cuts. Fed Governor Christopher Waller said he is in favor of another reduction at the upcoming policy meeting later this month, while Stephen Miran argued for a more aggressive easing stance. Markets are now pricing in nearly a 100% chance of a 25-basis-point interest rate cut in October, according to CME's FedWatch tool.

On the international front, trade relations between the United States and China deteriorated further on Thursday after US President Donald Trump stated that the two nations were already engaged in a trade war. Later, US Treasury Secretary Scott Bessent intensified the dispute by referring to China's top trade negotiator as an "unhinged" wolf warrior - a term used for tough-talking Chinese diplomats - fueling tensions rather than easing them. This uncertain environment is heightening risk aversion and weighing on the US Dollar.

However, the drop in Crude Oil prices, which have hit their lowest level since May on Friday, could limit the downside for the pair. As Canada is the largest Oil exporter to the United States, falling Oil prices typically weigh on the Loonie's value.

Meanwhile, Canada's latest employment figures showed a surprise gain in September, reducing expectations for another interest rate cut by the Bank of Canada (BoC) in October.