USD/CAD sees an upside above 1.2970 on expectations of a hawkish Fed, oil tumbles

• USD/CAD is hovering around 1.2950 as investors are sidelined ahead of the Fed’s interest rate meet.
• The BOC may elevate its interest rates to 3% to tame the soaring inflation.
• Oil prices have tumbled on advancing odds of a slump in the aggregate demand.

The USD/CAD pair is oscillating in a narrow range of 1.2944-1.2959 in the early Asian session after registering a fresh four-week high at 1.29751 on Tuesday. The asset has displayed a five-day winning streak and is expected to extend the same after violating Tuesday’s high at 1.2975.

An expectation of an aggressive hawkish monetary policy by the Federal Reserve (Fed) is strengthening the greenback bulls against loonie. The Fed is set to announce a strong rate hike after incorporating the sky-rocketing Consumer Price Index (CPI) and a tight labor market. Price pressures have reached the rooftop and are denting the paychecks of the households. Therefore, the market participants are expecting a rate hike by 75 basis points (bps) this time.

On the loonie front, research firm Fitch believes that the growth rate in Canada could decline to 2.2% in CY 2023 from 3.8% in CY2023. Also, the global rating giant has dictated that the Bank of Canada could accelerate its interest rates by 150 bps to 3%, which is beneficial for containing higher prices.

Meanwhile, oil prices have tumbled vigorously on soaring recession fears due to higher inflationary pressures. A liquidity shrinking program by the Fed is going to bring a serious drop in aggregate demand. This will eventually dampen the demand for oil in the global market and investors have started considering the same, which is capping the oil bulls. Investors should be aware of the fact that Canada is a leading exporter of oil to the US and lower oil prices result in lower fund flows into the US economy.