USD/CAD slides back below 1.2500 mark amid rising oil prices, subdued USD demand

• USD/CAD witnessed fresh selling on Monday and snapped two successive days of the winning streak.
• An uptick in oil prices underpinned the loonie and exerted pressure amid subdued USD price action.
• Hawkish Fed expectations should act as a tailwind for the buck and limit the downside for the major.

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

Following an early uptick to the 1.2525-1.2530 region, the USD/CAD pair met with a fresh supply on Monday and for now, seems to have snapped two successive days of the winning streak. Modest recovery in crude oil prices underpinned the commodity-linked loonie and exerted downward pressure on the major amid subdued US dollar demand. That said, a combination of factors should act as a tailwind for spot prices and help limit deeper losses, at least for the time being.

Last week, the US announced a plan to sell up to 1 million bpd of oil from the Strategic Petroleum Reserve (SPR) for six months starting in May 2022. Moreover, the International Energy Agency also agreed to release more oil on Friday. This, along with a two-month truce between a Saudi Arabia-led coalition and the Houthi group aligned with Iran, eased oil supply concerns. Adding to this, the COVID-19 outbreak in China could cap the upside for oil prices.

On the other hand, growing acceptance that the Fed would adopt a more aggressive policy stance to combat stubbornly high inflation should lend support to the buck. The markets have been pricing in a 100 bps Fed rate hike over the next two meetings and the bets were reaffirmed by the US jobs report on Friday. This, in turn, pushed the US Treasury bond yields higher, which favours the USD bulls and supports prospects for the emergence of dip-buying around the USD/CAD pair.

Hence, the focus will remain on the FOMC meeting minutes, scheduled for release on Wednesday. In the meantime, fresh developments surrounding the Russia-Ukraine saga, along with the US bond yields, might influence the USD. Apart from this, traders will take cues from oil price dynamics to grab some short-term opportunities. Nevertheless, the USD/CAD pair, for now, seems to have stalled its recovery from the YTD low, around the 1.2430-1.2425 area touched last week.

Technical levels to watch