USD/CAD hits three-week high, around 1.2775 amid sustained USD buying/retreating oil

• USD/CAD gained traction for the third straight day and climbed to over a three-week high.
• The post-FOMC USD rally remained uninterrupted and remained supportive of the move.
• Retreating oil prices undermined the loonie and provided an additional boost to the pair.

The USD/CAD pair scaled higher through the first half of the European session and shot to an over three-week high, around the 1.2775 region in the last hour.

A combination of supporting factors assisted the USD/CAD pair to reverse an intraday dip to the 1.2710 area and turn positive for the third successive day on Friday. Crude oil prices pulled away from a fresh seven-year high touched in the previous day and undermined the commodity-linked loonie. This, along with the prevalent strong bullish sentiment surrounding the US dollar, continued extending support to the major.

In fact, the USD Index built on its post-FOMC momentum and climbed to the highest level since July 2020 amid expectations that the US central bank will tighten its policy at a faster pace. The money markets have been pricing in the possibility of five quarter-point hikes by the end of 2022. Moreover, interest rate futures imply a 20% risk that the first hike in March could be 50 basis points, which acted as a tailwind for the buck.

On the other hand, the Canadian dollar was weighed down by the not so hawkish Bank of Canada rate decision on Wednesday to leave the benchmark interest rate unchanged. This might have disappointed some market participants anticipating an imminent start of the tightening cycle amid a surge in domestic inflation to a three-decade high. Adding to this, the Canadian central bank also lowered its inflation and growth forecasts.

With the latest leg up, the USD/CAD pair has now rallied over 300 pips from the 1.2450 support zone, or over a two-month low touched last week. Acceptance above the 1.2700 mark and the subsequent move up supports prospects for additional gains. The positive outlook is reinforced by bullish oscillators on the daily chart. Hence, a further near-term appreciating move, towards reclaiming the 1.2800 mark, remains a distinct possibility.

Market participants now look forward to the US economic docket – featuring the release of the Core Personal Consumption Expenditure Price Index and revised Michigan Consumer Sentiment Index. This, along with the US bond yields, will influence the USD. Apart from this, oil price dynamics should provide some impetus to the USD/CAD pair.

Technical levels to watch