USD/CAD recovers modest intraday losses, upside potential seems limited

• USD/CAD stages a modest recovery from a multi-day trough touched earlier this Tuesday.
• An uptick in Crude Oil prices could underpin the Loonie and cap gains amid a weaker USD.
• Bets that the Fed is nearing the end of its rate-hiking cycle to act as a headwind for the buck.

The USD/CAD pair comes under some renewed selling pressure on Tuesday and drops to a four-day low, around the 1.3245 region during the early European session. Spot prices, however, manage to recover a major part of the intraday losses and currently trade near the 1.3275-1.3280 region, nearly unchanged for the day.

Any meaningful upside for the USD/CAD pair, however, seems elusive in the wake of sustained US Dollar (USD) selling bias and the emergence of some buying around Crude Oil prices, which tends to underpin the commodity-linked Loonie. Speculation that the Federal Reserve (Fed) is nearing the end of its policy tightening cycle led to a further decline in the US Treasury bond yields and drag the USD to a two-month low. Apart from this, signs of stability in the equity markets drag the safe-haven buck to a two-month low.

Crude Oil prices, meanwhile, inch back closer to a multi-week high touched on Monday and remain well supported by supply cuts announced by the world's biggest oil exporters - Saudi Arabia and Russia - for August. Apart from this, hopes for a recovery in fuel demand during the second half of 2023 lend some support to the black liquid. That said, looming recession risk might keep a lid on any further gains for Oil prices. This, along with bets for a 25 bps Fed rate hike in July, could help limit losses for the USD/CAD pair.

Despite a slight miss from the headline US NFP print, the unexpected dip in the unemployment rate and persistently strong wage growth pointed to still-tight labor market conditions. Moreover, several Fed officials on Monday backed the case for further policy tightening by the US central bank. This, in turn, assists the USD/CAD pair to attract some dip-buying as traders seem reluctant to place aggressive directional bets ahead of the US consumer inflation figures on Wednesday, which will influence the USD demand in the near term.

In the meantime, the USD will take cues from the US bond yields and the broader risk sentiment in the absence of any relevant market-moving economic data. Apart from this, Oil price dynamics should provide some impetus to the USD/CAD pair and allow traders to grab short-term opportunities.

Technical levels to watch