USD/CAD flirts with weekly low amid rising oil prices, eyes 1.2800 ahead of US data/FOMC

• USD/CAD edged lower for the second straight day and refreshed its weekly low on Wednesday.
• A goodish pickup in oil prices underpinned the loonie and acted as a headwind for the major.
• The downside seems limited ahead of the highly-anticipated FOMC monetary policy decision.

The USD/CAD pair remained on the defensive through the early European session and was last seen trading around the 1.2820 region, or the weekly low.

Crude oil prices rallied nearly 3% on Wednesday after the European Commission President, Ursula von der Leyen, announced the sixth round of sanctions against Russia. The proposal included phasing out the Russian supply of crude oil within six months and refined products by the end of the year, which helped offset demand worries in China and acted as a tailwind for the black liquid. This, in turn, underpinned the commodity-linked loonie and weighed on the USD/CAD pair.

The downside, however, remains cushioned amid the underlying bullish sentiment around the US dollar, bolstered by expectations for a more aggressive policy tightening by the Fed. Investors seem convinced that the US central bank would hike interest rates at a faster pace to curb soaring inflation. This was evident from elevated US Treasury bond yields, which assisted the USD to stand tall near the multi-year peak and extended some support to the USD/CAD pair.

Hence, the market focus will remain glued to the outcome of a two-day FOMC monetary policy meeting, scheduled to be announced later during the US session. The Fed is widely expected to raise interest rates by 50 bps and lay down plans to start shrinking its massive, a near $9 trillion balance sheet. Investors will also scrutinize Fed Chair Jerome Powell's remarks to see if the US central bank is ready to hike rates further even if the economy weakens.

Heading into the key event risk, the US ADP report on private-sector employment and the ISM Services PMI will be looked upon for some impetus. Apart from this, oil price dynamics could allow traders to grab some short-term opportunities around the USD/CAD pair.

Technical levels to watch