USD/CAD retreats from the 1.3400 neighbourhood or a two-year high set earlier this Wednesday. A sharp intraday rally in crude oil prices underpins the loonie and acts as a headwind for the pair. Retreating US bond yields is holding back the USD bulls from placing fresh bets and capping gains. Traders now seem to move to the sidelines and await the highly-anticipated FOMC policy decision.
The USD/CAD pair hits a two-year high on Wednesday, though struggles to capitalize on the move and retreats a few pips from the 1.3400 neighbourhood. The pair, however, manages to stick to its modest intraday gains and is trading around the 1.3375-1.3380 region during the early European session.
The US dollar gains strong follow-through traction for the second straight day and remains supported by hawkish Fed expectations. This, in turn, is seen as a key factor acting as a tailwind for the USD/CAD pair. The US central bank is widely anticipated to deliver another supersized 75 bps rate increase at the end of a two-day policy meeting on Wednesday. The markets have also priced in a small possibility of a full 100 bps hike, which, along with the prevalent cautious mood, continues to lend support to the safe-haven greenback.
The market sentiment remains fragile amid concerns about a deeper global economic downturn. That said, a modest pullback in the US Treasury bond yields is holding back the USD bulls from placing aggressive bets. Apart from this, a sharp intraday rally in crude oil prices underpins the commodity-linked loonie and further contributes to capping gains for the USD/CAD pair. Investors also seem reluctant and prefer to move to the sidelines ahead of the highly-anticipated FOMC policy decision, scheduled later during the US session.
Investors will further take cues from the updated economic projections and the so-called dot plot. Furthermore, Fed Chair Jerome Powell's remarks at the post-meeting press conference will be scrutinized for clues about the future rate-hiking path. This will play a key role in driving the USD demand in the near term. Apart from this, oil price dynamics should help determine the next leg of a directional move for the USD/CAD pair. Heading into the key event risk, spot prices seem more likely to consolidate in a range.