USD/CAD holds gains ahead of the Fed, with downside attempts limited at 1.3650

• Canadian Dollar trims some losses as the USD pulls back ahead of the Fed.
• The Greenback rallied on Tuesday, with investors wary of the US involvement in the Israel-Iran war.
• The market is now looking at the Fed for further clues about a September rate cut.

The USD/CAD is trimming some gains on Wednesday, with investors reducing USD long positions ahead of the Federal Reserve's monetary policy meeting, due later today. The pair retreated from highs near 1.3700 but still holds most of Tuesday's gains.

The Dollar rallied about 0.8% on Tuesday, fuelled by a strong risk-averse sentiment after US President Trump demanded Iran's unconditional surrender, threatened to increase its involvement in the war, and flagged the option of killing Iran's supreme leader, Ali Khamenei.

Middle East tensions, on the other hand, are also pushing Crude prices higher. The US benchmark WTI Oil has been rallying sharply over the last two weeks to reach its highest prices since late January. With Canada being one of the world's main Oil exporters, higher crude prices tend to support the CAD.

The Fed will define the US Dollar's near-term direction

Investors' focus today is shifting towards the Federal Reserve. The bank is widely expected to leave interest rates unchanged, but Chairman Powell's comments and the economic and interest rate projections might alter the market's monetary policy expectations.

Powell has been reluctant to commit to further monetary easing, citing concerns about inflationary pressures stemming from higher tariffs. The main point today will be assessing the impact of the weak macroeconomic data recently released on the bank's forward guidance.

Any dovish hint in the Fed's rhetoric might heighten hopes of a rate cut, probably in September, which would increase negative pressure on the US Dollar.