USD/CAD drops to two-week low, further below 1.3000 amid weaker USD, rising oil prices

• USD/CAD continues losing ground for the fourth straight day and dives to a nearly two-week low.
• Rising oil prices underpin the loonie and exert heavy pressure amid broad-based USD weakness.
• Aggressive Fed rate hike bets should limit the USD downside and lend some support to the major.

The USD/CAD pair meets with a fresh supply following an early uptick to the 1.3040 area and turns lower for the fourth successive day on Monday. The downward trajectory drags spot prices to a nearly two-week low, around the 1.2980-1.2975 zone during the early European session and is sponsored by a combination of factors.

As investors look past Friday's disappointing Canadian employment details, a further recovery in crude oil prices from a multi-month low touched last week underpins the commodity-linked loonie. Apart from this, the heavily offered tone surrounding the US dollar exerts additional downward pressure on the USD/CAD pair and contributes to the intraday decline.

A symbolic output cut by OPEC+, along with Russia's threat to cut oil flows to any country that backs a price cap on its crude, raises concerns about tight global supply and offers support to oil prices. On the other hand, a generally positive tone around the equity markets drags the safe-haven greenback further away from a two-decade high touched last week.

That said, concerns that a deeper global economic downturn, along with fresh COVID-19 curbs in China, could curb fuel demand should cap oil prices. This, along with elevated US Treasury bond yields, bolstered by the prospects for more aggressive rate hikes by the Fed, should offer some support to the buck and help limit losses USD/CAD pair, at least for now.

The markets seem convinced that the Fed will continue to tighten its monetary policy at a faster pace to tame inflation. That said, a supersized 75 bps rate hike at the September FOMC meeting is already priced in. Hence, the USD bulls might now wait for the release of the latest US consumer inflation figures, due on Tuesday, before placing fresh bets.

In the meantime, the broader market risk sentiment and the US bond yields will continue to play a key role in driving the USD demand on Monday. Apart from this, oil price dynamics will be looked upon for some short-term trading opportunities around the USD/CAD pair amid absent relevant market-moving economic releases, either from the US or Canada.

Technical levels to watch