- USD/CAD is trading in a slight negative bias for the second day in a row on Tuesday.
- Bullish oil prices are supporting the Loonie, putting pressure amid a softer USD.
- The decline appears limited as traders await a key FOMC decision on Wednesday.
The USD/CAD pair remains on the defensive for the second consecutive day on Tuesday, hitting a three-day low around 1.3150 during the Asian session.
Oil prices consolidating recent strong gains to a more than three-month high hit on Monday and remaining well supported by hopes that further stimulus from China – the world’s biggest oil importer – will boost fuel demand. In addition, expectations of tighter global supply act as a tailwind for the illiquid, which in turn is seen as an underpinning of the commodity Loonie, acting as a headwind for the USD/CAD pair.
The American dollar (USD), on the other hand, is pulling back from a two-week high and for now appears to have halted the recent recovery from the April 2022 lows that took place over the past week or so. This is seen as another factor putting some pressure on the USD/CAD pair, although the lack of strong subsequent selling warrants some cation before placing aggressive bearish bets and positioning for further losses.
Traders may prefer to take a back seat and wait for further stimulus on future Federal Reserve (Fed) rate hikes. It’s worth recalling that markets are pricing in the possibility of any further interest rate hikes beyond the expected 25 bps at the end of Wednesday’s two-day FOMC meeting. So the focus is on the accompanying policy statement and Fed Chair Jerome Powell’s post-meeting press conference remarks.
The Fed’s policy outlook will play a key role in driving USD demand in the near term and provide new directional impetus for the USD/CAD pair. Meanwhile, traders will look to the release of the US consumer sentiment index and the Conference Board’s Richmond manufacturing index on Tuesday. This week US Economic Paper also includes Advance Q2 GDP print and Core PCE Price Index – the Fed’s preferred indicator of inflation.
In addition, the dynamics of oil prices may further contribute to creating some meaningful trading opportunities in the vicinity USD/CAD few. Against the above fundamental background, it is prudent to wait for a strong subsequent sell-off and a sustained break/acceptance below 1.3100 to support the prospects of resuming the downward trajectory from the YTD high touched in March.