USD/CAD drops to over two-week low, weakens further below mid-1.2800s

• USD/CAD continued losing ground for the third straight day and dropped to over a two-week low.
• Bullish crude oil prices underpinned the loonie and exerted pressure amid subdued USD demand.
• Reduced bets for aggressive Fed rate hikes, a positive risk tone weighed on the safe-haven buck.

The USD/CAD pair witnessed follow-through selling for the third successive day on Tuesday and broke through the 1.2865-1.2860 horizontal support during the early European session. The downward trajectory dragged spot prices to over a two-week low, around the 1.2830 region and was sponsored by a combination of factors.

Concerns about tight global supplies amid expectations for fresh sanctions against Russian oil and gas exports that might come out of the G7 meeting pushed crude oil prices to a one-week high. This, along with rising bets for a 75 bps rate hike move by the Bank of Canada in July, continued underpinning the commodity-linked loonie. Apart from this, subdued US dollar demand exerted some downward pressure on the USD/CAD pair.

The recent decline in commodity prices raised hopes that inflation might be nearing its peak and forced investors to scale back expectations for more aggressive policy tightening by the Fed. Apart from this, a goodish recovery in the global risk sentiment boosted investors' confidence, which was evident from a generally positive tone around the equity markets. This was seen as another factor that dented demand for the safe-haven buck.

The risk-on flow offered some support to the US Treasury bond yields, which, along with recession fears could help limit deeper losses for the greenback and help limit losses for the USD/CAD pair. Investors remain concerned that rapidly rising interest rates and tighter financial conditions would pose challenges to global economic growth. This might keep a lid on any optimistic move in the markets and lend support to the USD.

That said, sustained weakness below the 1.2865-1.2860 congestion zone favours bearish traders and supports prospects for a further near-term depreciating move for the USD/CAD pair. Traders now look forward to the US economic docket - featuring the release of the Conference Board's Consumer Confidence Index and Richmond Manufacturing Index. Apart from this, the US bond yields and the broader risk sentiment will drive the USD demand.

Market participants will further take cues from oil price dynamics to grab short-term trading opportunities around the USD/CAD pair. That said, traders might refrain from placing aggressive directional bets ahead of the OPEC+ meeting and Fed Chair Jerome Powell's remarks in a panel discussion during the latter part of the week.

Technical levels to watch