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  • USD/CAD was seen consolidating the overnight strong gains to the highest level since May 5.
  • Hawkish Fed continued underpinning the USD, albeit retreating US bond yields capped gains.
  • A further pullback in oil prices weighed on the loonie and acted as a tailwind for the major.

The USD/CAD pair held steady near the 1.2280-85 region during the early European session and consolidated the post-FOMC gains to the highest level since May 5.

The pair, so far, has struggled to capitalize on the previous day’s strong move up and witnessed a subdued/range-bound price action through the first half of the trading action on Thursday. That said, a combination of factors supports prospects for an extension of the recent bounce from the vicinity of the key 1.2000 psychological mark, or multi-year lows touched earlier this month.

The US dollar remained well supported by the Fed’s sudden hawkish turn, signalling that it might raise interest rates at a much faster pace than anticipated previously. The so-called dot plot indicated two rate hikes by the end of 2023 as against March’s projection for no increase until 2024. Adding to this, seven members pencilled in a rate hike or more in 2022 as compared to four in March.

Meanwhile, the Fed’s super hawkish pivot dampened investors’ appetite for perceived riskier assets. This was evident from a sharp pullback in the equity markets, which further benefitted the greenback’s relative safe-haven status. However, a softer tone around the US Treasury bond yields held the USD bulls from placing aggressive bets and kept a lid on any further gains for the USD/CAD pair.

On the other hand, some follow-through pullback in crude oil prices undermined the commodity-linked loonie. This might turn out to be another factor that might continue to act as a tailwind for the USD/CAD pair. This, in turn, suggests that the path of least resistance is up and any meaningful corrective slide might still be seen as a buying opportunity, rather remain limited.

Market participants now look forward to the US economic docket – featuring the release of the Philly Fed Manufacturing Index and the usual Initial Weekly Jobless Claims. This, along with the US bond yields, might influence the USD later during the early North American session. Apart from this, oil price dynamics will further assist traders to grab some short-term opportunities around the USD/CAD pair.

Technical levels to watch