USD/CAD dips under 1.2800 as sharp reversal from Wednesday’s post-Fed high continues

• USD/CAD has dipped below 1.2800 in recent trade and is now more than 1.2% lower from Wednesday’s peaks.
• The dollar is weaker and markets risk-on after the final Fed meeting of the year, helping the loonie.
• Technical selling upon the break below a recent uptrend likely contributed to the recent drop.

USD/CAD has seen a sharp pick up in volatility over the course of the last two sessions. To recap, the pair hit fresh multi-month highs near 1.2940 in the immediate aftermath of Wednesday’s Fed monetary policy announcement. The pair had been moving higher in the run-up to the meeting after data confirmed an easing of inflationary pressures as expected in Canada in November.

Wednesday’s Fed policy announcement was hawkish leaning, with the pace of the bank’s QE taper doubled in January, three rate hikes indicated in 2022, while Chair Jerome Powell painted a bullish picture of the US economic outlook for 2022. Despite this, risk appetite saw a substantial improvement in the aftermath of the meeting, given the lack of big surprises and amid Powell’s optimism on the economy and this weighed on the buck and is helping risk-sensitive FX.

Thus, USD/CAD has reversed sharply lower again and in recent trade passed underneath the 1.2800 level. That marks a more than 1.2% turnaround from Wednesday’s high, with USD/CAD currently down about 0.4% on the day and trading in the 1.2775 area. Technical selling once USD/CAD broke below an uptrend that had been in play since the start of last week likely also contributed to the recent decline. The pair will now eye a test of its 21-day moving average in the 1.2730s, with the next major level of support below that the December lows around 1.2600.