USD/CAD steadily climbs back to 1.3400 amid retreating Oil prices, stronger USD

• USD/CAD draws support from a combination of factors and climbs back closer to the 1.3400 mark.
• Retreating Oil prices undermines the Loonie and acts as a tailwind amid a modest USD strength.
• The Fed’s less hawkish outlook could cap the USD ahead of the key US CPI report on Wednesday.

The USD/CAD pair builds on the previous day's late rebound from the 1.3315 region, or over a three-week low and gains some follow-through traction on Tuesday. The steady intraday uptick lifts spot prices back closer to the 1.3400 mark during the mid-European session and is sponsored by a combination of factors.

Crude Oil prices edge lower amid some profit-taking following the recent strong recovery from a 17-month low, which, in turn, is seen undermining the commodity-linked Loonie. The US Dollar, on the other hand, scales higher for the second successive day amid hopes that the US banking sector is not headed for a wider crisis and provides an additional boost to the USD/CAD pair. In fact, the Federal Reserve's (Fed) Senior Loan Officer Opinion Survey (SLOOS) released on Monday showed that tightening credit conditions was due to the aggressive rate hikes rather than severe banking sector stress.

Apart from this, a softer risk tone - as depicted by a fresh leg down in the equity markets - further benefits the safe-haven buck and contributes to the bid tone surrounding the USD/CAD pair. That said, growing acceptance that the Fed is nearing the end of its year-long rate-hiking cycle might keep a lid on any meaningful upside for the Greenback. Apart from this, the latest optimism over a fuel demand recovery, led by easing concerns about an imminent recession, should act as a tailwind for Oil prices. This, in turn, should cap gains for the major and warrants caution before positioning for a further intraday move up.

Traders might also refrain from placing aggressive bets in the absence of any relevant market-moving economic releases, either from the US or Canada, and ahead of the latest US consumer inflation figures on Wednesday. The crucial US CPI report will play a key role in influencing expectations about the Fed's next policy move. This, in turn, should drive the USD demand in the near term and help determine the next leg of a directional move for the USD/CAD pair. This makes it prudent to wait for strong follow-through buying before confirming the spot prices have formed a bottom near the 1.3300 mark.

Technical levels to watch