USD/CAD recovers further from YTD low, retakes 1.2500 amid sustained USD buying

• USD/CAD gained some positive traction on Wednesday and recovered further from the YTD low.
• The Fed’s hawkish outlook pushed the USD to a two-year high and extended support to the pair.
• The Ukraine crisis acted as a tailwind for oil prices, which might underpin the loonie and cap gains.

The USD/CAD pair climbed to a two-day high during the early European session and is now looking to extend the momentum further beyond the 1.2500 psychological mark.

The pair built on the previous day's solid bounce of nearly 100 pips from the vicinity of the 1.2400 mark, or the lowest level since November 2021 and gained some follow-through traction on Wednesday. The US dollar scaled higher for the fifth successive day and shot to a nearly two year high amid expectations for a more aggressive policy tightening by the Fed. This, in turn, was seen as a key factor that acted as a tailwind for the USD/CAD pair.

It is worth mentioning that the markets anticipate that the Fed would hike interest rates by 100 bps over the next two meetings to combat stubbornly high inflation. Adding to this, Fed Governor Lael Brainard said on Tuesday that the US central bank could start reducing its balance sheet at a rapid pace as soon as the May meeting. This, in turn, pushed the US Treasury bond yields to a multi-year peak, which, along with the cautious mood, underpinned the safe-haven greenback.

The market sentiment remains fragile amid fading hopes for a diplomatic solution to end the war in Ukraine and the prospect of more Western sanctions on Russia over its alleged war crimes. The incoming geopolitical headlines continued fueling supply concerns, which extended some support to crude oil prices. This could benefit the commodity-linked loonie and keep a lid on any meaningful gains for the USD/CAD pair, warranting caution for bullish traders.

Hence, it will be prudent to wait for strong follow-through buying before confirming that the USD/CAD pair has bottomed out and positioning for a further appreciating move. Market participants now look forward to the Canadian Ivey PMI for some impetus. The focus, however, will remain on the FOMC minutes, due later during the US session, which will influence the USD. Traders will further take cues from oil price dynamics for some short-term opportunities.

Technical levels to watch