USD/CAD hovers around monthly high of 1.2900 amid sluggish oil, hawkish Fed expectations

• USD/CAD probes four-day uptrend amid quiet markets in Asia.
• Chatters over Fed’s 75 bp rate hike in June joined fears of recession to weigh on market sentiment.
• US dollar, Treasury yields benefit from the rush to risk safety, oil prices remain sidelined.
• Risk catalysts are crucial for directions ahead of Wednesday’s FOMC.

USD/CAD flirts with monthly high as bulls take a breather following the four-day run-up during Tuesday’s Asian session. That said, the quote seesaws near 1.2900 by the press time as traders seek fresh clues.

Alike other major currency pairs, USD/CAD also portrayed the broad US dollar strength at the week’s start amid the market’s fears of faster/heavier rate hikes during this week’s Federal Open Market Committee (FOMC). The hawkish Fed expectations were joined by pessimism surrounding China to offer additional strength to the US dollar’s safe-haven demand.

The risk-aversion wave propelled the US Dollar Index (DXY) to rise to the fresh high since 2002 while also fuelling the US 10-year Treasury yields to the highest in over a decade. It should be noted that prices of crude oil, Canada’s main export, remain supported at around $120.00 as traders expect more stimulus from China and a supply crunch ahead.

It’s worth noting that major investment banks, including Goldman Sachs and JP Morgan, recently hiked their Fed rate expectations to include the odds of a 75 bp lift on Wednesday. Also, the US rate futures imply a 96% chance of the Fed raising rates by 75 bps at the June meeting.

Considering the recession fears joining the hawkish expectations from global central banks and inflation woes, not to forget China’s covid jitters, USD/CAD is likely to witness further upside. However, a market consolidation can’t be ruled out ahead of Wednesday’s Fed meeting.

Technical analysis

A three-month-old horizontal hurdle around 1.2900 appears to challenge the USD/CAD bulls. However, the pair’s sustained trading beyond the 50-DMA, at 1.2745 by the press time, keeps the buyers hopeful.