- USD/CAD reversed a dip to the 1.2435 region and short to near two-month tops on Monday.
- The Fed’s hawkish surprise continued acting as a tailwind for the USD and remained supportive.
- An uptick in oil prices might underpin the loonie and keep a lid on any further gains for the pair.
The USD/CAD pair seesawed between tepid gains/minor losses through the early European session and consolidated its recent strong gains to near two-month tops. The pair was last seen trading around the 1.2465-70 region, nearly unchanged for the day.
A combination of diverging forces failed to assist the USD/CAD pair to capitalize on last week's strong positive move, instead led to a subdued/range-bound price action on the first day of a new week. A modest uptick in oil prices underpinned the commodity-linked loonie. On the other hand, the ongoing decline in the US Treasury bond yields held the US dollar bulls on the defensive and capped gains for the major.
That said, the Fed's surprise hawkish shift acted as a tailwind for the USD and helped limit any meaningful corrective slide for the USD/CAD pair. The Fed surprised investors at the end of June policy meeting on Wednesday and brought forward its timetable for the first post-pandemic interest rate hikes. The so-called dot plot pointed to two rate hikes by the end of 2023 as against March's projection for no increase until 2024.
Adding to this, St. Louis Fed President James Bullard said on Friday that Fed Chairman Jerome Powell officially opened taper discussion at the last meeting. Speaking to CNBC, Bullard further added that the shift toward a faster tightening of monetary policy was a natural response to stronger economic growth and a quicker than expected rise in inflationary pressures.
The fundamental backdrop remains tilted firmly in favour of bullish traders and supports prospects for additional gains. Hence, a subsequent strength beyond the key 1.2500 psychological mark, towards testing the next relevant hurdle near the 1.2535 horizontal zone, now looks a distinct possibility. In the absence of any major market-moving economic release, the USD/oil price dynamics will continue to play a key role in influencing the USD/CAD pair.
Technical levels to watch
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