USD/CAD climbs to 1.3230 area on weaker Oil prices, modest USD strength

• USD/CAD gains traction for the second straight day and recovers further from the YTD low.
• Weaker Oil prices undermine the Loonie and lend support amid a modest USD strength.
• A goodish pickup in the US bond yields and a softer risk tone benefit the safe-haven buck.

The USD/CAD pair builds on the previous day's modest recovery from its lowest level since September 2022 and gains positive traction for the second successive day on Tuesday. Spot prices maintain the bid tone through the Asian session and currently trade around the 1.3225-1.3230 region, up 0.15% for the day.

Crude Oil prices remain depressed in the wake of worries that a global economic slowdown, particularly in China, will dent fuel demand. This, in turn, undermines the commodity-linked Loonie, which, along with a modest US Dollar (USD) strength, acts as a tailwind for the USD/CAD pair. It is worth recalling that the recent Chinese macro data showed that the world's second-largest economy is struggling to sustain the momentum seen earlier this year.

Even reports that China is considering a broad stimulus package to bolster economic support and the expected move by the People's Bank of China (PBoC), to cut one-year and five-year Loan Prime Rates (LPRs), fail to ease market concerns. This is evident from a weaker risk tone, which, along with a goodish pickup in the US Treasury bond yields, pushes the safe-haven USD higher for the third straight day and lends support to the USD/CAD pair.

The Federal Reserve (Fed), though skipped a rate hike last week, signalled that borrowing costs may still need to rise by as much as 50 bps by the end of this year. The markets were quick to react and are now pricing in another 25 bps lift-off at the July FOMC meeting, which, in turn, triggers a fresh leg up in the US bond yields. That said, the incoming softer US economic data raised questions over how much headroom the Fed has to keep raising rates.

Hence, the market focus now shifts to Fed Chair Jerome Powell's congressional testimony on Wednesday and Thursday, which will be scrutinized for fresh clues about the future rate-hike path.  This, in turn, will play a key role in determining the near-term trajectory for the USD and provide some meaningful impetus to the USD/CAD pair. In the meantime, Oil price dynamics should allow traders to grab short-term opportunities around the major.

Technical levels to watch