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  • USD/CAD remained confined in a narrow trading band through the early European session.
  • A softer tone around crude oil prices undermined the loonie and extended some support.
  • Hopes for more US stimulus kept the USD bulls on the defensive and capped the upside.

The USD/CAD pair lacked any firm directional bias and seesawed between tepid gains/minor losses, just above mid-1.2700s through the early European session.

The pair continued with its struggle to register any meaningful recovery from multi-year lows and has been oscillating in a narrow band over the past three trading sessions. The continuous surge in COVID-19 infections overshadowed the recent optimism over the rollout of vaccines for the highly contagious disease and benefitted the US dollar’s safe-haven status.

Apart from this, a softer tone surrounding crude oil prices undermined the commodity-linked currency – the loonie. This was seen as another factor that extended some support to the USD/CAD pair and helped limit the downside. That said, expectations for more US fiscal stimulus held the USD bulls from placing aggressive bets and failed to provide any impetus to the pair.

Given the recent downfall to the lowest level since April 2018, the subdued/range-bound price action might still be categorized as a consolidation phase. This, in turn, suggests that the near-term bearish trend might still be far from over. Hence, any attempted recovery move might still be seen as a selling opportunity and runs the risk of fizzling out rather quickly.

Market participants now look forward to the US economic docket – featuring the second-tier releases of the Empire State Manufacturing Index and Industrial Production data. This, along with the US stimulus headlines, might influence the USD price dynamics and produce some short-term trading opportunities. The key focus, however, will remain on the latest FOMC policy update.

The Fed is scheduled to announce its decision at the end of a two-day meeting on Wednesday. Market expectations are growing that the Fed will ease its monetary policy further by expanding the bond-buying program. The announcement could play a dominant role in driving the sentiment surrounding the greenback and provide a fresh directional impetus to the USD/CAD pair.

Technical levels to watch