USD/CAD slides to mid-1.2400s, back closer to the YTD low touched last week

• A combination of factors dragged USD/CAD lower for the second successive day.
• The Ukraine crisis acted as a tailwind for the loonie and exerted some pressure
• Modest USD weakness further contributed to offered tone surrounding the pair.
• Hawkish Fed expectations should limit the USD downside and lend some support.

The USD/CAD pair added to its intraday losses and dropped to a four-day low, around mid-1.2400s during the early European session.

The pair struggled to capitalize on its early uptick, instead met with a fresh supply in the vicinity of the 1.2500 psychological mark and turned lower for the second straight day on Tuesday. The prospect of more Western sanctions on Russia over its alleged war crimes in Ukraine, along with stalled Iran nuclear deal fueled concerns about tighter global supply. This, in turn, continued acting as a tailwind for crude oil prices, which benefitted the commodity-linked loonie and exerted downward pressure on the USD/CAD pair.

On the other hand, signs of stability in the financial markets failed to assist the safe-haven US dollar to build on its gains recorded over the past three trading sessions. This was seen as another factor that dragged the USD/CAD pair back closer to the YTD low touched last week. That said, growing acceptance that the Fed would adopt a more aggressive policy response to combat stubbornly high inflation should help limit losses for the buck. This, in turn, warrants some caution for aggressive bearish traders.

It is worth recalling that the markets have been pricing in a 100 bps Fed rate hike move over the next two meetings. Hence, the focus will remain glued to the FOMC monetary policy meeting minutes, due later during the US session. Ahead of the key release, the US ISM Services PMI would drive the USD demand and provide some impetus to the USD/CAD pair. Traders will further take cues from developments surrounding the Russia-Ukraine saga, which will influence oil price dynamics and produce some short-term opportunities.

Technical levels to watch