USD/CAD Approaches a One-Year High, With 1.3900 In View Prior To The FOMC Decision

During the Asian session on Wednesday, the USD/CAD pair experiences dip buying and approaches its highest level since October 2022, which was reached the day before. Presently, spot prices are fluctuating in the vicinity of 1.3885 and continue to be bolstered by a confluence of factors.

Despite concerns that the ongoing conflict between Israel and Hamas could disrupt Middle Eastern oil supplies, crude oil prices remain near a two-month low. In addition, the monthly Canadian GDP report that was released with unfavourable results on Tuesday further weakens the commodity-linked Loonie and provides a tailwind for the USD/CAD pair. Indeed, Statistics Canada data indicated that the economy essentially remained stagnant in August, and the July GDP figure was revised downward to reflect a slight contraction, from the initial estimate of zero growth. In addition, the preliminary estimate suggested that the economy remained relatively stable in September, equivalent to a 0.1% annualised decline in the third quarter. This figure substantiates the existence of a technical recession.

In addition to this, a moderate strengthening of the US Dollar (USD) emerges as an additional factor providing assistance to the USD/CAD pair. The likelihood of additional policy tightening by the Federal Reserve (Fed) sustains the upward trajectory of US Treasury bond yields, which in turn continues to provide advantages for the US dollar. In contrast, the USD bulls appear hesitant to place aggressive wagers and are currently awaiting the outcome of the eagerly awaited FOMC meeting prior to initiating new positions. Later during the US session, the US central bank is anticipated to declare its decision, which will be to maintain the status quo for the second consecutive day. Investors, on the other hand, appear certain that the Federal Reserve will maintain its hawkish position in 2023 to combat persistent inflation, in light of the US economy's resilience. They even leave the door open for one more rate increase.

Therefore, in an attempt to discern the trajectory of future rate hikes, market participants will diligently examine the attached monetary policy statement and the remarks made by Fed Chair Jerome Powell during the press conference that follows the meeting. Consequently, this will contribute to the identification of the subsequent segment of a bullish trend for the dollar and offer significant momentum to the USD/CAD pair. Traders will be confronted with the release of crucial US macro data—the ADP report on private-sector employment, the ISM Manufacturing PMI, and the JOLTS Job Openings data—later in the early North American session, as they approach the key central bank event risk. This, in conjunction with the volatility of oil prices, ought to generate opportunities for short-term trading around the major.