USD/CAD climbs to over two-week high amid sliding crude oil prices, sustained USD buying

• USD/CAD gained some follow-through traction for the fourth successive day on Monday.
• Retreating oil prices undermined the loonie and remained supportive amid a stronger USD.
• Aggressive Fed rate hike bets, the risk-off mood boosted demand for the safe-haven buck.

The USD/CAD pair built on last week's strong recovery move from the 1.2520-1.2515 region, or its lowest level since April 21 and gained some follow-through traction for the fourth straight day on Monday. The momentum pushed spot prices to a two-and-half-week high during the early European session and was sponsored by a combination of factors.

A fresh COVID-19 warning from China, along with the worsening global economic outlook, dashed hopes for a quick recovery in fuel demand. This, in turn, dragged crude oil prices further away from a three-month peak touched last week, which undermined the commodity-linked loonie. Apart from this, sustained US dollar buying offered support to the USD/CAD pair.

The latest US consumer inflation figures released on Friday reaffirmed bets that the Federal Reserve will get more aggressive to cool price pressures. In fact, the markets are now pricing in about 215 bps of cumulative hikes in 2022 and Fed funds futures reflect rising odds of a 75 bps rate hike by July, which pushed the US Treasury bond yields higher.

In fact, the yield on the benchmark 10-year US government bond rose to its highest since May 9 and the 2-year Treasury note - seen as a proxy for the Fed's policy rate - rose to 3% for the first time since 2008. Apart from this, the prevalent risk-off mood further acted as a tailwind for the safe-haven USD and remained supportive of the bid tone surrounding the USD/CAD pair.

The strong move up could further be attributed to some technical buying on sustained strength above the 1.2800 round-figure mark. It, however, remains to be seen if bulls are able to capitalize on the momentum or opt to lighten their bets ahead of the key central bank even risk - the outcome of the highly-anticipated FOMC policy meeting on Wednesday.

Technical levels to watch