USD/CAD flirts with YTD top, around mid-1.3000s amid weaker oil prices/sustained USD buying

• USD/CAD regained positive traction on Thursday and climbed back closer to the YTD peak.
• Aggressive Fed rate hike bets continued benefitting the USD and extended some support.
• A fresh leg down in oil prices weighed on the loonie and provided an additional lift to the pair.

The USD/CAD pair extended its steady intraday ascent through the mid-European session and climbed to the 1.3045 area, back closer to the YTD peak in the last hour.

A combination of supporting factors assisted the USD/CAD pair to build on the overnight goodish rebound from the 1.2920 area and gain some follow-through traction on Thursday. Firming expectations for a more aggressive policy tightening by the Fed pushed the US dollar to its highest level in nearly two decades. Apart from this, sliding crude oil prices undermined the commodity-linked loonie and acted as a tailwind for the major.

Despite signs that inflationary pressures in the world's biggest economy are peaking, investors seem convinced that the Fed will stick to its rate hike cycle. In fact, money market futures are now pricing in an 81% chance of a jumbo 75 bps rate hike in June amid concerns that China's zero-covid policy and the war in Ukraine would push consumer prices even higher. This, along with the risk-off mood, further benefitted the safe-haven buck.

Worries that fast-rising inflation will drive a sharp rise in interest rates and bring the global economy to a standstill tempered investors' appetite for perceived riskier assets. Apart from growing recession fears, strict Covid-19 lockdowns in China raised concerns about slowing fuel demand. Adding to this, a delay in the approval of the European Union's proposed phased embargo on Russian oil weighed on crude oil prices.

It, however, remains to be seen if bulls can capitalize on the move or if the USD/CAD pair meets with a fresh supply at higher levels, warranting some caution before positioning for any further gains. Market participants now look forward to the US Producer Price Index (PPI), which, along with the US bond yields and the broader risk sentiment, will influence the USD. Traders will further take cues from oil price dynamics to grab some short-term opportunities.

Technical levels to watch