USD/CAD struggles to find acceptance above 1.3200, focus shifts to BoC policy decision

The USD/CAD pair slips after building on the overnight goodish intraday rally from sub-1.3100 levels and bulls struggle to capitalize on the move or find acceptance above the 1.3200 mark.

The US dollar retreats from a fresh two-decade high set on Wednesday and turns out to be a key factor acting as a headwind for the USD/CAD pair. The fundamental backdrop, however, seems tilted firmly in favour of bullish traders and supports prospects for an extension of a nearly one-month-old strong appreciating move.

Growing acceptance that the Fed will tighten its monetary policy more aggressively to tame inflation should act as a tailwind for the greenback. In fact, the current market pricing indicates a greater chance of a 75 bps rate hike at the September FOMC meeting, which remains supportive of elevated US Treasury bond yields.

This, along with the prevalent risk-off mood, might continue to lend support to the safe-haven buck. Apart from this, declining crude oil prices could undermine the commodity-linked loonie and further contribute to limiting any meaningful pullback for the USD/CAD pair ahead of the Bank of Canada meeting later this Wednesday.

The prospects for rapid interest rate hikes, along with the economic headwinds stemming from fresh COVID-19 curbs in China and the ongoing war in Ukraine, have raised worries of a global recession. This could result in lower fuel demand, which, in turn, drags crude oil prices to their lowest level since February 2022.

Despite the aforementioned supporting factors, traders seem reluctant to place aggressive bullish bets and prefer to move to the sidelines ahead of the key central bank event risk. Investors will further take cues from speeches by Fed officials, which will influence the USD price dynamics and provide a fresh impetus to the USD/CAD pair.

Technical levels to watch