USD/CAD slides back closer to mid-1.2500s, focus remains on BoC/FOMC decision

• USD/CAD witnessed fresh selling on Wednesday and extended this week’s slide from the 1.2700 mark.
• Bullish crude oil prices, BoC rate hike bets underpinned the loonie and exerted downward pressure.
• Hawkish Fed expectations acted as a tailwind for the USD, though did little to stall the intraday decline.

The USD/CAD pair continued losing ground through the mid-European session and dropped to a two-day low, around the 1.2560 region in the last hour.

Following the previous day's good two-way price move, the USD/CAD pair came under renewed selling pressure on Thursday and extended this week's rejection slide from the 1.2700 mark. Anxiety over a potential supply disruption amid geopolitical tensions in Ukraine and the Middle East pushed crude oil prices back closer to a multi-year high touched earlier this January. This, in turn, underpinned the commodity-linked loonie and exerted downward pressure on the major.

The Canadian dollar was further supported by expectations that the Bank of Canada (BoC) could hike interest on Wednesday amid a jump in domestic inflation to a three-decade high in December. Bulls seemed rather unimpressed by modest US dollar strength, bolstered by the prospects for a faster policy tightening by the Fed. In fact, the markets seem convinced that the Fed will begin raising rates in March and have been pricing in a total of four hikes in 2022.

Hence, the market focus will remain on the key central bank event risks – the BoC monetary policy decision and the outcome of a two-day FOMC meeting. Apart from this, fresh developments surrounding the Russia-Ukraine tension will influence oil price dynamics and provide some meaningful impetus to the USD/CAD pair. Hence, it remains to be seen if the ongoing downfall marks the end of the recent bounce from the 1.2445 area, or is seen as a buying opportunity.

Technical levels to watch