USD/CAD recovers early lost ground, sits near multi-week high ahead of BoC

• USD/CAD attracted some dip-buying on Wednesday and inched closer to the multi-week high.
• The Fed’s hawkish outlook continued underpinning the USD and extended support to the pair.
• Subdued crude oil prices did little to influence the loonie or provide any meaningful impetus.
• Investors now preferred to move on the sidelines ahead of the BoC monetary policy decision.

The USD/CAD pair recovered the early lost ground and climbed to the top end of its daily trading range, around the 1.2640-1.2645 region during the first half of the European session.

The pair attracted some dip-buying near the 1.2610 region on Wednesday and inched back closer to a near four-week high, around the 1.2660 area touched the previous day. The US dollar stood tall around its highest level since May 2020 and continued drawing support from the prospects for a more aggressive policy tightening by the Fed. This, in turn, was seen as a key factor that acted as a tailwind for the USD/CAD pair amid subdued action around crude oil prices, which tend to drive demand for the commodity-linked loonie.

Despite the fact that the US Core CPI eased for the second straight month in March, the markets seem convinced that the Fed would hike interest rates at a faster pace to curb soaring inflation. In fact, the US consumer inflation showed no signs of easing in March and accelerated to levels last seen in 1981. The bets were reaffirmed by Fed Governor Lael Brainard's comments on Tuesday, saying that the US central bank will proceed with a series of interest rate hikes, as well as an effort to trim its balance sheet.

Apart from this, a pickup in the US Treasury bond yields further underpinned the greenback, though the risk-on impulse in the equity markets kept a lid on any further gains. On the other hand, expectations that the Bank of Canada (BoC) will raise interest rates by 50 bps and announce quantitative tightening (QT) to control spiralling inflation benefitted the Canadian dollar. The combination of diverging forces held back traders from placing aggressive bets around the USD/CAD pair ahead of the BoC decision later during the early North American session.

From a technical perspective, the emergence of some buying at lower levels and acceptance above a technically significant 200-day SMA favours bullish traders. Some follow-through buying beyond the overnight swing high will confirm that the USD/CAD pair has formed a temporary bottom near the 1.2400 mark and set the stage for a further appreciating move. Spot prices could then accelerate the momentum towards reclaiming the 1.2700 round-figure mark en-route the next relevant resistance near the 1.2715-1.2720 region.

Technical levels to watch