USD/CAD struggles near one-and-half week low, flat-lined below 1.2800 mark

• USD/CAD struggled to capitalize on its attempted recovery move from over a one-week low.
• Bullish oil prices underpinned the loonie and capped gains amid subdued USD price action.
• Break below the ascending channel support will set the stage for additional near-term losses.

The USD/CAD pair surrendered modest intraday gains and was last seen trading in the neutral territory, around the 1.2785 region heading into the European session.

Following the previous day's dramatic turnaround from the 1.2845-50 region, the USD/CAD pair gained some positive traction during the early part of the trading on Tuesday. However, the attempted recovery from a one-and-half-week low lacked bullish conviction and ran out of steam near the 1.2800 round-figure mark.

WTI crude oil prices held steady near the monthly high, just below the $76.00/barrel mark amid hopes that the Omicron coronavirus variant will have a limited impact on fuel demand. This, in turn, continued underpinning the commodity-linked loonie and capped gains for the USD/CAD pair amid subdued US dollar price action.

The optimism led by reports that the new strain may be less severe than the previous Delta variant remained supportive of the prevalent risk-on environment. Moreover, studies that Omicron infections are less likely to lead to hospitalization further boosted investors' confidence and weighed on the safe-haven greenback.

Apart from this, a softer tone around the US Treasury bond yields kept the USD bulls on the defensive and acted as a headwind for the USD/CAD pair. That said, the Fed's hawkish outlook, indicating at least three rate hikes next year, should help limit the downside for the USD and lend some support to the USD/CAD pair.

Adding to this, the year-end thin liquidity could also hold back traders from placing aggressive directional bets. Even from a technical perspective, the USD/CAD pair, so far, has managed to defend support marked by the lower boundary of a two-month-old ascending channel, which should now act as a key pivotal point.

A bank holiday in Canada and a relatively lighter US economic docket – featuring the release of the Richmond Manufacturing Index – also warrants some caution. That said, the broader risk sentiment will drive the USD demand and provide some impetus to the USD/CAD pair. Traders will further take cues from oil price dynamics to grab some short-term opportunities.

Technical levels to watch