USD/CAD juggles around 1.3300 as investors await Fed policy decision for fresh cues

• USD/CAD has turned sideways around 1.300 ahead of the interest rate decision by the Fed.
• The USD Index and Treasury yields dropped as the Fed is highly expected to announce a smaller interest rate hike.
• Oil prices recovered dramatically after upbeat China’s official PMI data.

The USD/CAD pair is displaying a back-and-forth move around the immediate support of 1.3300 in the early Tokyo session. The Loonie asset witnessed an immense sell-off on Tuesday after a decline in the United States Employment Cost Index improved the risk appetite of the market participants. The US Dollar Index (DXY) sensed intensified selling as a decline in the labor cost index bolstered the expectations of a smaller interest rate hike by the Federal Reserve (Fed).

The USD Index dropped firmly below 101.70 after failing to sustain an auction above the 102.00 resistance. Meanwhile, S&P500 futures are showing some losses after a fantastic Tuesday, portraying a caution in the overall upbeat market mood. The 10-year US Treasury yields have dropped to near 3.51%.

The FX domain is going through sheer volatility as investors are awaiting the release of the interest rate decision by the Fed. Fed chair Jerome Powell is highly expected to hike interest rates by 25 basis points (bps) to the 4.50-4.75% range, therefore investors are much concerned about the further roadmap of achieving a 2% inflation target.  

Analysts at TD Securities are of the view that The Federal Open Market Committee (FOMC) is likely to emphasize that despite slowing the pace of rate increases it is still determined to reach the terminal rate projected in the December dot plot.”

On the Loonie front, monthly Gross Domestic Product (GDP) (Nov) expanded by 0.1% while the street was expecting flat growth. A minor change in the GDP numbers might not force the Bank of Canada (BoC) to change its stance of remaining paused on interest rates. Last week, BoC Governor Tiff Macklem announced a pause in their interest rate hiking spell after pushing interest rates by 25 bps to 4.5%.

Meanwhile, oil prices recovered sharply on Tuesday after investors shrugged off uncertainty about global recession as the western central banks are set to announce fresh hikes to contain stubborn inflation. Also, upbeat China’s official PMI data-infused fresh blood into the oil price. It is worth noting that Canada is a leading exporter of oil to the United States and higher oil prices strengthen the Canadian Dollar.