USD/CAD sits near its highest level since June, looks to build on strength beyond 1.3500

• USD/CAD climbs to its highest level since early June, albeit struggles to capitalize on the momentum.
• The USD remains on the defensive and turns out to be a key factor acting as a headwind for the pair.
• Sliding Oil prices undermines the Loonie and helps limit the downside ahead of the FOMC minutes.

The USD/CAD pair climbs to a fresh high since early June during the Asian session on Wednesday, albeit continues with its struggle to find acceptance or build on the momentum beyond the 1.3500 psychological mark.

The US Dollar (USD) remains below its highest level in more than two months touched earlier this week as bulls seem reluctant to place aggressive bets in the wake of the uncertainty over the Federal Reserve's (Fed) future rate hike path. This, in turn, is seen as a key factor acting as a headwind for the USD/CAD pair, though weaker Crude Oil prices d undermines the commodity-linked Loonie and should help limit the downside, at least for the time being.

A 20 points slump in the Empire State Manufacturing Index to a reading of -19 in August reaffirmed market expectations that the Fed will pause its rate-hiking cycle at the upcoming meeting in September. That said, the upbeat US Retail Sales data released on Tuesday indicated that consumer spending held up well in July and pointed to an extremely resilient economy, which keeps the door open for one-more 25 bps lift-off by the end of this year.

Hence, the market focus will remain glued to the release of the FOMC meeting minutes, due later during the US session. Investors will look for fresh cues about the Fed's near-term policy outlook, which will influence the USD price dynamics and provide a fresh impetus to the USD/CAD pair. In the meantime, bets that the Fed will keep interest rates higher for longer remain supportive of elevated US Treasury bond yields and lend support to the buck.

It is worth recalling that yield on the benchmark 10-year US government bond shot to a nearly 10-month top on Tuesday before easing below the 4.20% level. Nevertheless, the aforementioned fundamental backdrop favours the USD bulls. This, along with the overnight muted reaction to stronger Canadian consumer inflation figures, validates the positive outlook and suggests that the path of least resistance for the USD/CAD pair is to the upside.

Market participants now look forward to the US economic docket – featuring the release of Building Permits, Housing Starts and Industrial Production figures later during the early North American session. This, along with the US bond yields and the broader risk sentiment, will drive demand for the safe-haven USD. Apart from this, Oil price dynamics should contribute to producing short-term trading opportunities around the USD/CAD pair.

Technical levels to watch