USD/CAD drops to over one-week low, further below 1.2700 amid rallying oil prices

• USD/CAD witnessed heavy selling for the second successive day on Tuesday.
• Rallying oil prices underpinned the loonie and exerted pressure on the pair.
• A stronger USD did little to impress bullish traders or stall the ongoing slide.

The USD/CAD pair continued drifting lower through the mid-European session and dropped to over a one-week low, around the 1.2680 region in the last hour.

The pair extended the previous day's retracement slide from the vicinity of mid-1.2800s, or the highest level since September 20 and witnessed heavy selling for the second successive day on Tuesday. Crude oil prices built on the overnight strong rally and boosted the commodity-linked loonie, which, in turn, exerted heavy pressure on the USD/CAD pair.

Concerns about the impact of the new coronavirus variant on the global fuel demand eased after reports indicated that Omicron patients had only shown mild symptoms. Apart from this, stalled Iran nuclear talks delayed the return of additional crude supply and further underpinned the black gold amid the prevalent strong risk-on mood in the financial markets.

On the other hand, the US dollar continued drawing some support from firming expectations that the Fed would tighten its monetary policy sooner rather than later to contain stubbornly high inflation. This, along with a further recovery in the US Treasury bond yields, acted as a tailwind for the greenback, albeit did little to lend any support to the USD/CAD pair.

That said, extremely oversold conditions on the 1-hour chart warrant some caution before placing fresh bearish bets around the USD/CAD pair. Investors might also refrain from placing aggressive bets ahead of the Bank of Canada monetary policy meeting on Wednesday. This, in turn, supports prospects for the emergence of some buying and a modest intraday recovery.

Heading into the key central bank event risk, traders on Tuesday might take cues from the release of trade balance data from the US and Canada. This, along with Canadian Ivey PMI and oil price dynamics, will influence the loonie. On the other hand, the broader market risk sentiment will drive the USD demand and produce some trading opportunities around the USD/CAD pair.

Technical levels to watch