USD/CAD sits near its highest level since November, above mid-1.3600s ahead of BoC

• USD/CAD climbs to a fresh YTD peak and draws support from a combination of factors.
• Softer Oil prices undermine the Loonie and act as a tailwind amid sustained USD buying.
• Traders look to the BoC policy decision and US labor market reports for a fresh impetus.

The USD/CAD pair builds on the previous day's bullish breakout momentum through the 1.3700 mark and climbs to its highest level since early November on Wednesday. The pair holds steady above mid-1.3700s through the first half of the European session and seems poised to prolong its recent upward trajectory witnessed over the past three weeks or so.

The emergence of fresh selling around Crude Oil prices undermines the commodity-linked Loonie, which, along with sustained US Dollar buying, continues to act as a tailwind for the USD/CAD pair. Investors remain worried that rapidly rising borrowing costs will dampen global economic growth and dent fuel demand. Apart from this, fading optimism over a strong economic recovery in China drags the black liquid lower for the second successive day.

The USD, meanwhile, stands tall near a multi-month peak and continues to draw support from the overnight hawkish remarks by Federal Reserve Chair Jerome Powell. In the prepared remarks for his semi-annual congressional testimony, Powell indicated that interest rates might need to go up faster and higher than previously anticipated. Powell further added that the US central bank is prepared to increase the pace of rate hikes to combat stubbornly high inflation.

This, in turn, lifts bets for a jumbo 50 bps lift-off at the March FOMC meeting and remains supportive of elevated US Treasury bond yields. In fact, the yield on the benchmark 10-year US government bond is holding steady near the 4.0% threshold and the rate-sensitive two-year Treasury note hovers near its highest level since 2007. This, along with growing worries about economic headwinds stemming from rapidly rising borrowing costs, benefits the safe-haven buck.

That said, signs of stability in the equity markets hold back the USD bulls from placing aggressive bets. Traders also seem reluctant and prefer to wait on the sidelines ahead of the Bank of Canada (BoC) meeting later this Wednesday. The Canadian central bank is expected to pause its tightening cycle and leave the overnight rate unchanged. This widens the Fed-BoC policy divergence and supports prospects for a further near-term appreciating move for the USD/CAD pair.

Traders on Wednesday will further take cues from the US economic docket, featuring the release of the ADP report on private-sector employment and JOLTS Job Openings data. This, along with Powell's second day of congressional testimony, the US bond yields and the broader risk sentiment, will drive the USD demand. Apart from this, Oil price dynamics might further contribute to producing short-term trading opportunities around the USD/CAD pair.

Technical levels to watch