USD/CAD sticks to modest recovery gains below 1.2500 mark, lacks follow-through

• USD/CAD gained some positive traction on Monday and snapped ten days of the losing streak.
• A slump in oil prices undermined the loonie and extended support amid sustained USD buying.
• The lack of follow-through buying warrants cautions before positioning for any further recovery.

The USD/CAD pair traded with a positive bias heading into the North American session, though seemed to struggle to capitalize on the move beyond the 1.2500 psychological mark.

A combination of supporting factors assisted the USD/CAD pair to attract some buying on the first day of a new week and recover a part of Friday's slide to over a two-month low. Crude oil prices plunged over 5% amid fears over weaker fuel demand led by fresh COVID-19 restrictions in China. This, in turn, undermined the commodity-linked loonie and acted as a tailwind for the major amid sustained US dollar buying.

The greenback drew support from expectations for a more aggressive policy response by the Fed to combat high inflation. In fact, the markets have priced in a 50 bps rate hike at the May meeting. This, along with worries that rising commodity prices would put pressure on already elevated high inflation, pushed the yield on the benchmark 10-year US government bond to a nearly three-year high and underpinned the buck.

The USD/CAD pair, however, lacked bullish conviction, warranting some caution before confirming that the two-week-old downward trajectory has run its course. Nevertheless, the pair, for now, seems to have snapped ten successive days of the losing streak. In the absence of any major market-moving economic releases, the USD/oil price dynamics will influence spot prices and allow traders to grab some short-term opportunities.

Technical levels to watch