USD/CAD Analysis: 200-DMA/1.2500 mark holds the key, focus remains on BoC/FOMC

• A combination of diverging forces failed to provide any impetus to USD/CAD on Tuesday.
• Bullish oil prices, BoC rate hike expectations underpinned the loonie and capped gains.
• The downside seems cushioned ahead of the key central bank event risks on Wednesday.

The USD/CAD pair witnessed good two-way price moves on Tuesday and finally settled nearly unchanged for the day. A combination of supporting factors pushed the US dollar to over a two-week high and extended some support to the major. That said, bullish crude oil prices underpinned the commodity-linked loonie and kept a lid on any meaningful upside.

The greenback continued drawing support from expectations that the Fed will tighten its monetary policy at a faster pace than anticipated. In fact, the markets seem convinced that the Fed will begin raising interest rates in March and have been pricing in a total of four hikes in 2022. This was reinforced by elevated US Treasury bond yields, which extended some support to the buck. Apart from this, concerns about a potential armed conflict in Ukraine further benefitted the greenback's relative safe-haven status.

Meanwhile, geopolitical tensions in Ukraine and the Middle East have been fueling fears over tighter supply and led to a fresh leg up in crude oil prices. This, along with speculations that the Bank of Canada (BoC) could increase rates as early as this week, acted as a tailwind for the domestic currency. This, in turn, capped gains for the major, rather prompted some selling during the Asian session on Wednesday. The downside, however, seems cushioned as investors seemed reluctant ahead of the key central event risks.

The BoC is scheduled to announce its monetary policy decision during the early North American session. Apart from this, the market focus will remain glued to the outcome of a two-day FOMC policy meeting, which will play a key role in determining the next leg of a directional move for the major. In the meantime, traders on Wednesday will take cues from the USD/oil price dynamics to grab some short-term opportunities around the pair.

Technical outlook

From a technical perspective, the recent bounce from the lowest level since November 10 faltered near the 1.2700 mark, or just ahead of the 50% Fibonacci level of the 1.2964-1.2451 downfall. A subsequent slide back below the 1.2600 mark might prompt some technical selling and drag the pair towards the 1.2575 area (23.6% Fibo. level). Some follow-through selling would turn the pair vulnerable to accelerate the fall towards challenging the very important 200-day SMA, currently around the key 1.2500 psychological mark. This is followed by the monthly low, around mid-1.2400s, which if broken decisively should pave the way for an extension of the downward trajectory witnessed over the past one month or so.

On the flip side, the 38.2% Fibo. level, around the 1.2650 region, now seems to act as immediate resistance. A sustained strength beyond might allow bulls to make a fresh attempt to conquer the 1.2700 round-figure mark. Some follow-through buying would negate any near-term bearish bias and push spot prices to the 1.2765 resistance, marking the 61.8% Fibo. level. The momentum could get extended towards the 1.2800 mark en-route the monthly high, around the 1.2815 region.