The USD/CAD currency pair bounced back from recent lows on Wednesday, climbing above the 1.4300 level in early trading. After dipping to its lowest level in nearly two weeks on Tuesday, the pair is finding renewed support, although the upside remains capped as traders brace for the highly anticipated U.S. Federal Reserve policy announcement later today.

USD/CAD Extends Recovery for the Second Day

USD/CAD is building on its rebound from Tuesday’s low of 1.4260, which marked the weakest level since early March. In the Asian session on Wednesday, the pair managed to reclaim the key 1.4300 psychological barrier, marking a second consecutive day of gains. At the time of writing, spot prices were hovering around 1.4312, reflecting a 0.25% intraday increase.

The pair’s rebound is largely attributed to a modest recovery in the U.S. dollar, which found some footing after plunging to multi-month lows earlier this week. The Dollar Index (DXY), which tracks the greenback’s performance against six major currencies, was last seen trading around 102.90, up 0.15% on the day.

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Investors Cautious Ahead of Fed's Rate Decision and Economic Projections

Despite the current bounce, traders are hesitant to place aggressive bullish bets on USD/CAD, preferring to wait on the sidelines ahead of the Federal Open Market Committee (FOMC) decision due later today at 14:00 ET (18:00 GMT). The Fed is widely expected to hold its benchmark interest rate steady at 5.25%-5.50%, maintaining its restrictive stance as policymakers balance slowing inflation with ongoing economic resilience.

However, market participants are more focused on the Fed’s updated economic projections—specifically the "dot plot," which will signal the anticipated path of interest rate cuts in 2025. Fed Chair Jerome Powell’s press conference at 14:30 ET (18:30 GMT) will also be closely scrutinized for any hints regarding the timing of potential policy easing.

According to the CME FedWatch Tool, markets are pricing in a 57% probability of a rate cut by June 2025, down from 63% last week, as inflation remains sticky at 3.2% annually, above the Fed’s 2% target

Crude Oil Pullback Limits Canadian Dollar’s Strength

The Canadian dollar, also known as the "Loonie," is facing headwinds from weaker crude oil prices. West Texas Intermediate (WTI) crude futures slipped 0.6% to $81.75 per barrel on Wednesday after rallying to a two-week high of $83.15 earlier in the week. The late pullback in oil prices undermines the commodity-linked CAD, providing additional support for USD/CAD.

Still, geopolitical tensions in the Middle East are keeping oil prices from falling sharply. Concerns about potential supply disruptions due to escalating conflict in the region are acting as a floor for crude, limiting downside risks for the Canadian currency.

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Canada’s Inflation Surprise Adds Complexity to BoC Outlook

On the domestic front, Canada’s latest inflation data released on Tuesday surprised to the upside. The Consumer Price Index (CPI) rose 2.6% year-over-year in February, marking an eight-month high and exceeding the Bank of Canada’s (BoC) target. The core inflation rate, which strips out volatile items, also ticked higher to 3.1%.

The unexpected inflation jump complicates the BoC’s policy path, as it had previously signaled a potential pivot toward rate cuts in the second half of 2025. Market participants now question whether the central bank will delay easing, supporting the Canadian dollar in the medium term.

“The hotter-than-expected CPI print makes it difficult for the BoC to justify near-term rate cuts,” said Royce Mendes, Managing Director at Desjardins. “But the central bank will likely remain cautious given the uneven economic data.”

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Technical Outlook: USD/CAD Holds Above Key Moving Averages

From a technical perspective, USD/CAD continues to trade above its 100-day Simple Moving Average (SMA), currently located around the 1.4280 region. This level is acting as near-term support, with buyers stepping in to defend it.

Immediate resistance lies near the 1.4330 zone, followed by the 1.4380 area—last week’s swing high. On the downside, a break below 1.4280 could expose the pair to further losses toward 1.4260, and potentially 1.4200 in the near term.

Momentum indicators like the Relative Strength Index (RSI) on the 4-hour chart are hovering near the 50-neutral mark, suggesting a balanced risk in the short run. However, the overall direction will likely depend on the Fed’s tone and the subsequent market reaction.

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Conclusion: USD/CAD Eyes Fed for Next Big Move

The USD/CAD pair is recovering modestly from recent lows, but the broader trend remains uncertain as investors await clarity from the Federal Reserve. A hawkish Fed could fuel further upside for the greenback, pushing USD/CAD higher in the short term. On the other hand, a dovish tone might drag the pair back toward its recent lows.

Crude oil prices and Canadian inflation data will also continue to play crucial roles in shaping sentiment around the Canadian dollar in the days ahead.

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