USD/CAD sits near two-year high, remains below 1.3400 as traders await FOMC decision

• 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.

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