The USD/CAD pair quickly recovered around 25-30 pips from the early European session low and shot to the 1.2665-70 region in the last hour.
The pair attracted some buying near the 1.2640 area on Thursday and for now, seems to have stalled this week's retracement slide from the highest level since late September. Crude oil prices moved further away from a weekly high touched the previous day and undermined the commodity-linked loonie. This, in turn, was seen as a key factor that acted as a tailwind for the USD/CAD pair.
Meanwhile, the prospects for an early policy tightening by the Fed helped limit any meaningful US dollar profit-taking slide and further extended some support to the USD/CAD pair. The markets have been pricing in the possibility for an eventual Fed rate hike move by July 2022 amid persistent inflationary pressures. The bets were reinforced by the FOMC minutes released on Wednesday.
In fact, policymakers were open to speeding up the tapering of the bond-buying program and moving quickly to raise interest rates if high inflation persists. This followed the release of the US PCE Price Index for October, which accelerated to the highest level since December 1990. The fundamental backdrop favours the USD bulls and supports prospects for a further appreciating move for the USD/CAD pair.
That said, investors might be reluctant to place aggressive bets amid relatively thin liquidity conditions on the back of the Thanksgiving holiday in the US. Nevertheless, the USD/CAD pair seems poised to reclaim the 1.2700 round-figure mark. Some follow-through buying should pave the way for a move back towards testing the recent swing high, around the 1.2745-50 region.
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