USD/CAD retreats to mid-1.3700s amid positive oil prices, modest USD pullback

• A combination of factors fails to assist USD/CAD to preserve its modest intraday gains.
• A further recovery in oil prices underpins the loonie and acts as a headwind for the pair.
• A  USD downtick further contributes to the slide, though the downside seems cushioned.

The USD/CAD pair struggles to capitalize on the modest intraday uptick or find acceptance above the 1.3800 mark and retreats from a multi-day high touched earlier this Thursday. The pair drops to the lower end of its daily trading range heading into the European session and is currently placed just above the mid-1.3700s.

Crude oil prices add to the overnight strong recovery gains from over a two-week low, which, in turn, underpins the commodity-linked loonie. On the other hand, a goodish recovery in the US equity futures prompts some selling around the safe-haven US dollar and acts as a headwind for the USD/CAD pair. The USD downtick, however, is more likely to remain limited amid the prospects for a more aggressive policy tightening by the Fed.

The markets seem convinced that the US central bank will continue to hike interest rates at a faster pace to tame inflation. The CME's FedWatch tool indicates a nearly 100% chance for another supersized 75 bps at the November FOMC meeting. This remains supportive of elevated US Treasury bond yields. Moreover, recession fears could lend support to the buck and support prospects for the emergence of some dip-buying.

Investors, meanwhile, remain worried about the economic headwind stemming from rapidly rising borrowing costs and the protracted Russia-Ukraine war, which should keep a lid on any optimism in the markets. Furthermore, concerns that a deeper global economic downturn will dent fuel demand might cap the upside for the black liquid. This, in turn, suggests that the path of least resistance for the USD/CAD pair is to the upside.

Hence, any subsequent slide back towards the 1.3700 mark might still be seen as a buying opportunity. Traders now look forward to the US economic docket, featuring Philly Fed Manufacturing Index, the usual Weekly Initial Jobless Claims and Existing Home Sales data. This, along with speeches by influential FOMC members, the US bond yields and the broader risk sentiment, will drive the USD and provide some impetus to the USD/CAD pair.

Technical levels to watch