USD/CAD corrects to 1.2970-1.2965 region amid rising oil prices, weaker USD

• USD/CAD witnessed fresh selling on Wednesday and was pressured by a combination of factors.
• Rebounding oil prices underpinned the loonie and exerted pressure amid modest USD weakness.
• Aggressive Fed rate hike bets should limit the USD losses and lend support ahead of the US CPI.

The USD/CAD pair weakened further below the 1.3000 psychological mark and dropped to a fresh daily low during the early part of the European session. The pair was last seen trading around the 1.2970-1.2965 region, down over 0.40% for the day.

Following the previous day's good two-way price moves, the USD/CAD pair came under some renewed selling pressure and for now, seems to have snapped a four-day winning streak to the fresh YTD peak. A goodish pickup in crude oil prices underpinned the commodity-linked loonie and exerted downward pressure on spot prices amid modest US dollar weakness.

Crude oil made a solid comeback from a near three-week low amid concerns about tight global supply, led by the war in Ukraine. That said, the bleak outlook for global fuel demand on the back of growing recession risks and strict coronavirus-induced lockdowns in top oil importer - China - should cap gains for the black liquid, at least for the time being.

On the other hand, the ongoing retracement slide, along with strong rally in the equity markets, prompted some selling around the safe-haven USD. This was seen as another factor that acted as a headwind for the USD/CAD pair. That said, the prospects for aggressive policy tightening by the Fed should help limit deeper losses for the greenback.

In fact, the markets seem convinced that the Fed would need to take more drastic action to bring inflation under control and are pricing in a 200 bps rate hike for the rest of 2022. Hence, the focus will remain glued to the latest US consumer inflation figures, due for release later during the early North American session.

The US CPI report could influence the Fed's tightening path, which, along with the broader market risk sentiment, would influence the USD demand. Apart from this, traders will take cues from oil price dynamics to grab short-term opportunities. Nevertheless, the fundamental backdrop supports prospects for the emergence of some dip-buying around the USD/CAD pair.

Technical levels to watch