USD/CAD flirts with daily low, below 1.2500 amid an intraday spike in oil prices

• USD/CAD witnessed fresh selling on Monday and snapped two days of the winning streak.
• Strong intraday rally in oil prices underpinned the loonie and exerted downward pressure.
• Fed rate hike expectations, the Ukraine crisis benefitted the USD and should limit losses.

The USD/CAD pair remained depressed through the early North American session and was last seen flirting with the daily low, around the 1.2480-1.2485 region.

The pair struggled to capitalize on last week's late recovery from the YTD low and met with a fresh supply on Monday, snapping two successive days of the winning streak. A sharp intraday rally in crude oil prices, now up over 4% for the day, underpinned the commodity-linked loonie. This, in turn, was seen as a key factor that attracted fresh selling around the USD/CAD pair, though the downside seems limited amid a goodish pickup in the US dollar demand.

The market sentiment remains fragile amid fading hopes for a de-escalation in the Ukraine war and talk of additional sanctions on Russia. This, along with growing acceptance that the Fed would tighten its monetary policy at a faster pace to combat high inflation, acted as a tailwind for the greenback.  In fact, the markets have been pricing in a 100 bps Fed rate hike move over the next two meetings, which remained supportive of elevated US Treasury bond yields.

Moreover, the US announced a plan last week 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.

The combination of the aforementioned factors favours bullish traders and supports prospects for the emergence of some dip-buying around the USD/CAD pair. That said, traders might refrain from placing aggressive bets ahead of the FOMC monetary policy meeting minutes, scheduled for release on Wednesday. Hence, any attempted recovery move is more likely to attract fresh selling at higher levels and runs the risk of fizzling out rather quickly.

Technical levels to watch