USD/CAD pushes above 1.2900 pre-Fed as cooling Canadian CPI weighs on loonie

• USD/CAD has pushed above 1.2900 in advance of the Fed and is eyeing a test of the 1.2950 annual high.
• CPI cooled in Canada in November and confirmation of this seemed to weigh on the loonie, which is underperforming currently.

USD/CAD has pushed above the psychologically important 1.2900 level on Tuesday and looks likely to stay there in the run-up to the Fed’s policy announcement (at 1900GMT). That means the pair is currently trading with gains of about 0.3%, having started the session closer to 1.2850.

The annual pace of Canadian Core Consumer Price Inflation in November saw a slight drop versus October's levels, which, though expected, cuts in the opposite direction to the building price pressures seen most recently out of the US, UK and EU. Thus, the data appeared to weigh on the loonie at the time as it eases (somewhat) the pressure on the BoC to tighten monetary policy settings.

Hawkish leaning commentary from BoC Governor Tiff Macklem more recently has not been enough to lift the loonie from near the bottom of Wednesday’s G10 performance table. For reference, Macklem said that the significant amount of slack that was in the Canadian economy is now substantially diminished, before adding that the time is coming closer when the bank will move away from its exceptional forward guidance. As a result, the loonie is one of the worst-performing G10 currencies ahead of the Fed meeting, though if the Fed does deliver some sort of surprise that alters risk appetite, the G10 rankings could quickly switch up.

In the case of a hawkish surprise (say the Fed hints at ending QE earlier than expected, or indicated sooner and faster than expected rate hikes), USD/CAD would likely continue Wednesday’s rally and test August highs around 1.2950. A more dovish outturn could see the pair drop back towards support around 1.2850.