USD/CAD sticks to modest recovery gains, upside remains capped amid rising oil prices

• USD/CAD managed to defend the very important 200-DMA amid resurgent USD demand.
• Bullish crude oil prices underpinned the loonie and kept a lid on any meaningful upside.
• Traders now eye Canadian GDP and the US Consumer Confidence data for a fresh impetus.

The USD/CAD pair attracted some buying near the very important 200-day SMA on Tuesday and reversed a part of the overnight slide to its lowest level since April 22. The pair maintained its bid tone through the early European session and was last seen trading around the 1.2670-1.2675 region, just a few pips below the daily high.

The US dollar made a solid comeback from over a one-month low touched on Monday amid a sharp spike in the US Treasury bond yields, bolstered by comments from Fed Governor Christopher Waller. Speaking at an event in Frankfurt, Waller backed a 50 bps rate hike for several meetings until inflation eases back toward the central bank’s goal. Apart from this, a fresh wave of the risk-aversion trade boosted the greenback's safe-haven demand and extended some support to the USD/CAD pair.

The market sentiment remains fragile amid doubt that central banks can hike interest rates to curb inflation without impacting economic growth. The worries resurface following the release of official Chinese PMIs, which showed that business activity in both manufacturing and services sectors remained in contraction territory during May. This, along with concerns that the global supply chain disruption would push consumer prices even higher, tempered investors' appetite for riskier assets.

On the other hand, the commodity-linked loonie drew support from a fresh leg up in crude oil prices. In fact, the black liquid shot to its highest level since March 9 after the European Union agreed to slash oil imports from Russia. Apart from this, expectations of demand recovery in China fueled worries of a tighter market and boosted the commodity. This, in turn, was seen as the only factor that kept a lid on any meaningful upside for the USD/CAD pair, at least for the time being.

Market participants now look forward to the release of the monthly Canadian GDP, due later during the early North American session. From the US, the Conference Board's Consumer Confidence Index, along with the US bond yields and the broader market risk sentiment, might influence the USD. Traders will further take cues from oil price dynamics for some meaningful trading opportunities around the USD/CAD pair.

Technical levels to watch