USD/CAD eases from over two-year top, holds comfortably above 1.3800 mark

• A combination of factors lifts USD/CAD to its highest level since May 2020 on Tuesday.
• Retreating oil prices undermines the loonie and offers support amid a stronger USD.
• Aggressive Fed rate hike bets, recession fears continue to benefit the safe-haven buck.

The USD/CAD pair gains traction for the second successive day and climbs to its highest level since May 2020 on Tuesday. The pair sticks to its gains just below mid-1.38000s through the early European session and seems poised to prolong the recent strong rally witnessed over the past week or so.

Crude oil prices extend the overnight pullback from the highest level since late August amid worries that a global economic downturn and rising COVID-19 cases in China will hurt global fuel demand. This, in turn, is seen undermining the commodity-linked loonie and acting as a tailwind for the USD/CAD pair. Apart from this, the underlying bullish sentiment surrounding the US dollar supports prospects for a further near-term appreciating move.

The prospects for a more aggressive policy tightening by the US central bank, along with recession fears and geopolitical risk, continue to benefit the greenback. The markets seem convinced that the Fed will continue to hike interest rates at a faster pace to tame inflation and have been pricing in another supersized 75 bps increase in November. The bets were further lifted by the overnight hawkish comments from Fed Vice Chair Lael Brainard.

This, in turn, remains supportive of elevated US Treasury bond yields. Furthermore, the prevalent risk-off environment is seen as another factor driving haven flows towards the buck. The market sentiment remains fragile amid concerns about economic headwinds stemming from rapidly rising borrowing costs. Adding to this, a further escalation in the Russia-Ukraine conflict and US-China trade jitters tempers investors' appetite for riskier assets.

The aforementioned fundamental factors suggest that the path of least resistance for the USD/CAD pair is to the upside. That said, the lack of any follow-through buying warrants caution for aggressive bullish traders in the absence of relevant market-moving economic releases, either from the US or Canada. That said, speeches by influential FOMC members might influence the USD price dynamics and allow traders to grab short-term opportunities on Tuesday.

Technical levels to watch