USD/CAD remains confined in a range around mid-1.2600s, awaits BoC/Fed on Wednesday

• USD/CAD edged higher on Tuesday, albeit lacked any follow-through or bullish conviction.
• Fed rate hike bets, surging US bond yields benefitted the USD and extended some support.
• Weaker crude oil prices undermined the loonie and further acted as a tailwind for the pair.
• Investors, however, seemed reluctant ahead of the FOMC and BoC decision on Wednesday.

The USD/CAD pair traded with a mild positive bias through the early North American session, albeit seemed struggling to capitalize on the move beyond mid-1.2600s.

Following the previous day's pullback from the 1.2700 mark, or a two-week high, the USD/CAD pair edged higher on Tuesday and was supported by a combination of factors. Weaker crude oil prices undermined the commodity-linked loonie and acted as a tailwind for the major. Adding to this, broad-based US dollar strength also extended some support to the pair, though the uptick lacked bullish conviction.

The USD continued drawing support from firming expectations that the Fed will tighten its monetary policy at a faster pace than anticipated. In fact, the markets have fully priced in an eventual lift-off in March and expect a total of four hikes in 2022. This was reaffirmed by a strong pickup in the US Treasury bond yields, which turned out to be another factor that benefitted the greenback.

That said, speculations that the Bank of Canada could increase rates as early as this week – amid a jump in Canada’s annual inflation rate to a three-decade high – helped limit losses for the Canadian dollar. This, in turn, held back traders from placing aggressive bets heading into the key central bank event risks – the BoC policy decision and the outcome of a two-day FOMC meeting on Wednesday.

Hence, it will be prudent to wait for a strong follow-through buying before confirming that the USD/CAD pair has formed a strong base near the 1.2445 region and positioning for any further gains. Market participants now look forward to the release of the Conference Board's US Consumer Confidence Index. This, along with oil price dynamics, might provide some trading impetus to the USD/CAD pair.

Technical levels to watch