24 Jan 2022
The USD/CAD pair reversed an intraday dip and climbed to a nearly two-week high, around the 1.2585 region during the early European session.
The pair attracted some dip-buying near the 1.2555 area on Monday and is now be looking to build on the previous session's positive move amid modest US dollar strength. The prospects for a faster policy tightening by the Fed, along with escalating geopolitical tensions revive the USD demand and acted as a tailwind for the USD/CAD pair.
Investors seem convinced that the Fed would begin raising interest rates in March to combat high inflation and have been pricing in a total of four hikes in 2022. Apart from this, concerns about a possible Russian attack on Ukrain further benefitted the greenback's relative safe-haven status and extended some support to the USD/CAD pair.
Meanwhile, crude oil prices remained well supported by worries about supply disruption amid rising tensions in Eastern Europe and the Middle East. Apart from this, speculations that the Bank of Canada could increase rates as early as this week further underpinned the commodity-linked loonie. This, in turn, capped the upside for the USD/CAD pair.
Investors might also prefer to wait on the sidelines ahead of the key central bank event risks – the BoC policy decision and the outcome of a two-day FOMC meeting on Wednesday. The fundamental backdrop makes it prudent to wait for a strong follow-through buying before confirming that the USD/CAD pair has formed a strong base near mid-1.2400s.
In the meantime, traders on Monday will take cues from the release of the flash US PMI prints, due later during the early North American session. Apart from this, the US bond yields and the broader market risk sentiment will influence the USD. This, along with oil price dynamics, should produce some short-term opportunities around the USD/CAD pair.
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