USD/CAD recovers further from multi-week low, climbs back closer to mid-1.2900s

• A combination of factors assisted USD/CAD to gain traction for the second straight day.
• Weaker oil prices undermined the loonie and offered support amid a modest USD uptick.
• Traders keenly await the FOMC decision on Wednesday before placing directional bets.

The USD/CAD pair built on Friday's goodish rebound from the 1.2820 area, or a nearly four-week low and gained traction for the second successive day on Monday. The momentum pushed spot prices to a multi-day high, closer to mid-1.2900s during the first half of trading and was sponsored by a combination of factors.

Investors remain worried that a more aggressive tightening by major central banks could limit economic activity and pose challenges to global growth. This, along with the imposition of strict COVID-19 controls in China, has raised concerns about the fuel demand outlook and continued weighing on crude oil prices. This, in turn, undermined the commodity-linked loonie and acted as a tailwind for the USD/CAD pair amid the emergence of some US dollar buying.

Growing recession fears tempered investors' appetite for perceived riskier assets, which was evident from a generally weaker tone around the equity markets. Apart from this, a modest uptick in the US Treasury bond yields benefitted the safe-haven greenback. That said, expectations that an economic downturn in the US would force the Fed to slow its aggressive policy tightening path might keep a lid on any further gains for the buck and the USD/CAD pair.

Investors might also be reluctant to place aggressive bets ahead of this week's key event risk - the outcome of a two-day FOMC monetary policy meeting. The Fed is scheduled to announce its decision on Wednesday, which will be followed by the release of the Advance US Q2 GDP report on Thursday. This would play a key role in influencing the near-term USD demand and help investors to determine the next leg of a directional move for the USD/CAD pair.

In the meantime, the USD remains at the mercy of the US bond yields and the broader market risk sentiment amid absent relevant market-moving economic releases from the US on Monday. Apart from this, traders will take cues from oil price dynamics to grab short-term opportunities around the USD/CAD pair. Nevertheless, the fundamental backdrop favours bullish traders and supports prospects for some meaningful upside for spot prices.

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