USD/CAD back to square one near 1.3550 after wild gyrations post-Fed’s hawkish guidance

• USD/CAD has reached to near 1.3550 after volatile moves backed by Fed’s hawkish guidance.
• Fed’s terminal rate projection has escalated to 5.1% and it has promised a restrictive policy till inflation reached 2%.
• Oil prices could face volatility ahead as official US oil inventory data has reported a build-up of 10.231M barrels.

The USD/CAD pair has returned from where it started near 1.3550 after wild gyrations in the late New York session. The upside in the Loonie asset remained capped around 1.3610 while the downside got restricted near 1.3520. The Canadian Dollar major asset got severe hiccups after hawkish guidance by the Federal Reserve (Fed) chair Jerome Powell in its last monetary policy announcement of CY2023.

The market mood seems complicated for now as the US Dollar Index (DXY) is hovering near a fresh six-month low and the S&P500 settled with losses on Wednesday. It seems that the market participants need ample time to digest the hawkish guidance from the Fed as an interest rate hike by 50 basis points (bps) is in line with the expectations.

Demand for US Treasury bonds remained elevated as the concept of a smaller and slower interest rate hike is in place now. The 10-year US Treasury yields have dropped to near 3.47%.

An interest rate hike by 50 bps has pushed interest rates to 4.00-4.25% and Fed policymakers see the terminal rate at 5.1% by the end of CY2023. This indicates that there is still room for more rate hikes but the extent will remain smaller. Apart from the higher terminal rate, commentary that has escalated volatility in the global market is the promise of keeping policy restrictive till the inflation plummeted to 2%.

On the oil front, oil prices have extended their gains to near $77.50 in hopes of recovery in economic projections.  A deceleration in the rate hike process might not haunt firms in executing expansion plans, which would accelerate oil demand in the near term. West Texas oil could see some volatility in the near term as official United States oil inventory data has reported a sheer increase in oil stockpiles by 10.231M for the week ending December 09. It is worth noting that Canada is a leading exporter of oil to the US and higher oil prices strengthen the Canadian Dollar.