• USD/CAD rallied above prior monthly highs in the 1.2850s to hit its highest level since mid-September.
• Market commentators and analysts cited worries about the Omicron variant as weighing on the loonie.
• The pair is now focused on Wednesday’s Canada CPI, US Retail Sales and the Fed policy announcement.

USD/CAD surpassed its earlier monthly highs in the 1.2850s to hit its lowest levels since mid-September on Tuesday. That marked a roughly 0.4% rally from earlier session lows around the 1.2800 level and opens the door to an extended push toward’s the next key area of resistance around 1.2900 (the mid-September high) and then the 1.2950 mark just above it (the mid-August high).

Market commentators and analysts cited worries about the Omicron variant as weighing on the loonie in fitting with a broader downturn in risk appetite on the session. Michael Goshko, corporate risk manager at Western Union Business Solutions, told Reuters that “the increased concerns from public health officials are weighing on sentiment, not only here in Canada but abroad… There's so much uncertainty... It's not surprising to see commodity currencies like the Canadian dollar get harmed in an environment like this.”

But hotter than expected US Producer Price Inflation (PPI) figures released earlier in the session have also contributed to USD/CAD’s upside. Indeed, the dollar broadly strengthened against most of its G10 counterparts on Tuesday (apart from GBP which is likely deriving support from good UK labour market figures) after the annual rate of US PPI hit 9.6% in November, well above expectations.

Coming up at 2100GMT, Canadian PM Justin Trudeau is set to announce the government’s latest economic and fiscal forecasts in the so-called “fall economic statement”. Sources last week told Reuters that any new spending announcements would be “limited in scope”, which makes sense given already high inflation in Canada and pressure from the Canadian business community to exercise greater restraint with further government spending.

Speaking of inflation, the Canada November Consumer Price Inflation report will be released at 1330GMT on Wednesday alongside the US November Retail Sales report, which coud make for choppy conditions for the USD/CAD. BoC Governor Macklem is then scheduled to speak at 1700GMT ahead of the most important event of the week for USD/CAD, Fed policy announcement at 1900GMT and press conference with Jerome Powell at 1930GMT thereafter.