USD/CAD Price Forecast: Failure near YTD top warrants caution for bulls ahead of Fed

• USD/CAD retreats from YTD peak tested on Wednesday amid some USD profit-taking. 
• The Trump trade optimism should limit the USD losses ahead of the FOMC decision.
• Softer Crude Oil prices and bets for aggressive BoC rate cuts to cap gains for the CAD.

The USD/CAD pair comes under some selling pressure on Thursday and erodes a part of the previous day's strong move up to its highest level since October 2022. The US Dollar (USD) bulls opt to take some profits off the table after a blowout rally to a four-month top touched on Wednesday. Apart from this, retreating US Treasury bond yields and the prevalent risk-on mood turns out to be other factors weighing on the safe-haven buck, which, in turn, is seen dragging the currency pair lower. 

Any meaningful USD downfall, however, seems elusive amid hopes that Donald Trump's policies may boost economic growth and inflation, which could restrict the Federal Reserve’s (Fed) ability to cut rates. This could act as a tailwind for the US bond yields and support prospects for the emergence of some USD dip-buying. Apart from this, bets for a more aggressive easing by the Bank of Canada (BoC) could dent demand for the Canadian Dollar (CAD) and offer support to the USD/CAD pair. 

Meanwhile, Crude Oil prices remain depressed below a multi-week high touched on Tuesday amid speculations that OPEC will increase supply capacity in January. This could further undermine the commodity-linked Loonie and warrants some caution before placing bearish bets around the USD/CAD pair. Traders might also prefer to wait on the sidelines and look to the outcome of the highly anticipated two-day Federal Open Market Committee (FOMC) policy meeting later this Thursday. 

The US central bank is scheduled to announce its decision during the US session and is widely expected to lower borrowing costs by 25 basis points (bps). The market focus, however, will remain glued to the accompanying policy statement and Fed Chair Jerome Powell's remarks at the post-meeting press conference. Investors will look for cues about the Fed's policy outlook, which, in turn, will influence the near-term USD price dynamics and provide a fresh directional impetus to the USD/CAD pair. 

Technical Outlook

From a technical perspective, spot prices this week showed some resilience below the 23.6% Fibonacci retracement level of the recent rally from September's swing low. The subsequent strong move up favours bullish traders, though the overnight failure near the 1.3955-1.3960 area, or the year-to-date (YTD) peak, along with mixed oscillators on the daily chart, warrants caution before positioning for further gains. 

Meanwhile, any further decline might continue to find some support near the 1.3845 region (23.6% Fibo. level) ahead of the 1.3825-1.3820 area, or a nearly two-week low touched on Wednesday. Some follow-through selling, leading to a subsequent weakness below the 1.3800 mark, should pave the way for a slide towards the next relevant support near the 1.3755 zone, representing the 38.2% Fibo. level.

On the flip side, momentum back above the 1.3900 mark now seems to confront some resistance near the 1.3930 region ahead of the 1.3955-1.3960 strong barrier. A sustained strength beyond will be seen as a fresh trigger for bulls and allow the USD/CAD pair to aim to reclaim the 1.4000 psychological mark for the first time since May 2020. The momentum could extend further towards the 1.4100 round figure.

USD/CAD daily chart