- USD/CAD gains some positive traction on Wednesday and extends the recovery from the yearly low.
- Fed’s dovish outlook pushes USD to a two-year high and offers support for the pair.
- The war in Ukraine boosts oil prices, which could support the CAD and limit the pair’s gains.
The pair USD/CAD has risen to a two-day high at the start of the European session on Wednesday and now looks to extend momentum above the psychological level of 1.2500.
The pair has built on the previous day’s solid bounce of almost 100 pips from near the 1.2400 level, or the lowest level since November 2021, and gained some continuation traction on Wednesday. The US dollar rose for the fifth day in a row and soared to a nearly two-year high. amid expectations of more aggressive Fed tightening. This, in turn, was seen as a key factor that acted as a tailwind for the USD/CAD pair.
It is worth mentioning that the markets expect the Fed will raise interest rates by 100 basis points in the next two meetings to combat stubbornly high inflation. Additionally, Fed Governor Lael Brainard said on Tuesday that the US central bank could start shrinking its balance sheet at a rapid pace as early as the May meeting. This, in turn, pushed US Treasury yields to a multi-year high, which coupled with cautious sentiment, supported the safe-haven USD.
The market sentiment remains fragile amid fading hopes for a diplomatic solution to end the war in Ukraine and the prospect of more Western sanctions on Russia for its alleged war crimes. Incoming geopolitical news continued fueling oil supply concerns, which extended some support to crude prices. This could benefit the CADcurrency linked to commodity prices, and cap any significant gains for the USD/CAD pair, warranting caution for pair bulls.
Therefore, it will be prudent to wait for a continuation of strong buying before confirming that the USD/CAD pair has bottomed and positioning for further upside. Market participants are now waiting for the Canadian Ivey PMI release to gain some momentum. The focus, however, will remain on the FOMC minutes due to be released today during the American session, which will weigh on the USD. Investors will take further cues from oil price dynamics to take advantage of some near-term opportunities.
USD/CAD technical levels
Source: Fx Street
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