USD/CAD slides back closer to session low, downside potential seems limited
- A combination of factors failed to assist USD/CAD to capitalize on its modest intraday gains.
- The risk-on mood undermined the safe-haven USD and capped gains amid positive oil prices.
- A more hawkish Fed outlook should act as a tailwind for the greenback and help limit losses.
The USD/CAD pair surrendered a major part of its modest intraday gains and was last seen trading just a few pips above the daily low, around the 1.2835 region.
Following the previous day's post-FOMC turnaround from the 1.2935 area or a near four-month high, the USD/CAD pair gained some traction during the early part of the trading on Thursday. The attempted move up, however, lacked bullish conviction and faltered near the 1.2860 region amid a softer tone surrounding the US dollar.
A generally positive tone surrounding the equity markets turned out to be a key factor that kept the USD bulls on the defensive and acted as a headwind for the USD/CAD pair. Apart from this, an uptick in crude oil prices underpinned the commodity-linked loonie and further contributed to cap the upside for the major, at least for now.
That said, concerns about the economic fallout from the rapid spread of the Omicron variant and the imposition of fresh restrictions in Europe and Asia might keep a lid on the market optimism. Adding to this, a more hawkish Fed outlook should lend some support to the safe-haven greenback and help limit the downside for the USD/CAD pair.
It is worth recalling that the Fed on Wednesday announced that it would double the pace of tapering to $30 billion per month. Moreover, the so-called dot plot showed that officials expect to raise the fed funds rate at least three times next year. This, in turn, supports prospects for the emergence of some dip-buying around the USD.
Market participants now look forward to the US economic docket, featuring the release of the Initial Weekly Jobless Claims, Philly Fed Manufacturing Index, Industrial Production and flash PMIs. This, along with some volatility infused by the BoE/ECB policy decision and oil price dynamics, should provide some impetus to the USD/CAD pair.
Technical levels to watch