USD/CAD flat-lines above mid-131.00s amid retreating Oil prices, modest USD downtick

• USD/CAD oscillates in a narrow trading band through the early European session on Tuesday.
• A modest pullback in Oil prices undermines the Loonie and lends some support to the major.
• A positive risk tone prompts selling around the safe-haven USD and caps the upside for the pair.
• Traders now look to US macro data for some impetus, though the focus remains on the FOMC.

The USD/CAD pair struggles for a firm intraday direction and seesaws between tepid gains/minor losses through the early part of the European session on Tuesday. Spot prices currently trade just above mid-1.3100s, nearly unchanged for the day, though the fundamental backdrop favours bearish traders and suggests that the path of least resistance is to the upside.

A modest pullback in Crude Oil prices from over a three-month high touched on Monday undermines the commodity-linked Loonie and turns out to be a key factor acting as a tailwind for the USD/CAD pair. That said, hopes that additional stimulus measures from China will boost fuel demand, along with tighter global supplies, should continue to lend support to the black liquid. Apart from this, the emergence of some US Dollar (USD) selling might further contribute to limiting the upside for the major, at least for the time being.

In fact, the USD Index (DXY), which tracks the Greenback against a basket of currencies, retreats from a two-week high and for now, seems to have stalled its recent recovery move from the lowest level since April 2022 touched last week. The markets seem convinced that the Federal Reserve (Fed) is nearing the end of its current policy tightening. This, along with a generally positive tone around the equity markets, prompts some profit-taking around the safe-haven buck ahead of the two-day FOMC policy meeting starting this Tuesday.

The Fed is scheduled to announce its decision on Wednesday and is widely expected to hike interest rates by 25 bps. Investors, meanwhile, remain sceptic if the US central bank will commit to a more dovish stance or stick to its forecast for a 50 bps lift-off by the end of this year. Hence, the focus will remain glued to the accompanying policy statement and Fed Chair Jerome Powell's comments at the post-meeting press conference, which will be scrutinized for cues about the future rate-hike path and drive the USD demand in the near term.

In the meantime, traders on Tuesday will look to the US macro data - the Conference Board's Consumer Confidence Index and Richmond Fed Manufacturing Index - for some impetus later during the early North American session. This, along with the broader risk sentiment, will influence the USD. Apart from this, Oil price dynamics should produce short-term trading opportunities around the USD/CAD pair.

Technical levels to watch