USD/CAD slides below 1.2500 mark, fresh daily low amid an uptick in oil prices/weaker USD

• A combination of factors dragged USD/CAD back below the 1.2500 round figure on Tuesday.
• An uptick in oil prices underpinned the loonie and exerted pressure amid modest USD weakness.
• Hawkish Fed expectations, rising US bond yields should limit losses for the buck and the major.

The USD/CAD pair extended its steady intraday descent through the first half of the European session and dropped to a fresh daily low, back below the 1.2500 psychological mark in the last hour.

Following the overnight short-covering bounce and the subsequent pullback from the vicinity of the 1.2600 mark, a combination of factors prompted fresh selling around the USD/CAD pair on Tuesday. Hopes for progress in the Russia-Ukraine peace negotiations boosted investors' confidence. This was evident from a positive tone around the equity markets, which weighed on the safe-haven US dollar. Apart from this, an uptick in crude oil prices underpinned the commodity-linked loonie and exerted some downward pressure on the major.

The latest optimism over the possibility of a diplomatic solution to end the war in Ukraine, along with fears that fresh COVID-19 restrictions in China could impact fuel acted as a headwind for oil prices. Apart from this, growing acceptance that the Fed would tighten its monetary policy at a faster pace to combat stubbornly high inflation should help limit any further losses for the greenback. In fact, the markets have been pricing in a 50 bps Fed rate hike at the next two meetings, which, in turn, favours the USD bulls.

Expectations for a more aggressive Fed policy action was evident from the recent surge in the US bond yields, which pushed the benchmark 10-year note above 2.5%, to a nearly three years high. The fundamental backdrop supports prospects for the emergence of some dip-buying around the USD/CAD pair, warranting some caution for bearish traders. Hence, any subsequent downfall is more likely to find decent support near the 1.2465 region ahead of the YTD low, around mid-1.2400s, which should act as strong base for spot prices.

Market participants now look to the US economic docket, featuring the release of JOLTS Job Openings and the Conference Board's Consumer Confidence Index. Traders will further take cues from the incoming geopolitical headlines, which should influence the broader market risk sentiment. This, along with the US bond yields, will drive the USD demand. Apart from this, oil price dynamics might further contribute to producing some trading opportunities around the USD/CAD pair.

Technical levels to watch