USD/CAD jumps back closer to 1.2800 mark amid retreating oil prices, stronger USD

• A combination of supporting factors pushed USD/CAD to over a one-week high on Monday.
• Retreating oil prices undermined the loonie and extended some support amid stronger USD.
• Hawkish Fed expectations, the risk-off impulse continued benefitting the safe-haven buck.

The USD/CAD pair quickly retreated a few pips from over one-week high touched in the last hour and was last seen trading around the 1.2765 region, still up over 0.60% for the day.

The pair caught fresh bids during the early European session and broke out its intraday consolidation phase, with bulls now looking to build on last week's rebound from the monthly low. Despite the risk of a further escalation in the conflict between Russia and the West over Ukraine, crude oil prices pulled back from a more than seven-year high touched earlier this Monday. This, in turn, undermined the commodity-linked loonie and provided a goodish lift to the USD/CAD pair amid fresh US dollar buying.

The greenback remained well supported by growing acceptance that the Fed will tighten its monetary policy at a faster pace than anticipated to combat stubbornly high inflation. In fact, the markets have been pricing in the possibility of a 50 bps Fed rate hike move in March. The bets were boosted further after data released last Thursday showed that the headline CPI reached the highest level since February 1982 and the core CPI, which excludes food and energy prices, climbed 6.0% from a year ago.

Apart from this, the risk-off impulse – as depicted by a sell-off across the equity markets – further benefitted the greenback's safe-haven status. This was seen as another factor that contributed to the USD/CAD pair's strong intraday positive move. The global risk sentiment took a hit after US National Security Advisor Jake Sullivan warned on Sunday that “we are in the window where a Russian invasion of Ukraine could begin at any time and could happen during the Beijing winter Olympics.”

It, however, remains to be seen if bulls are able to capitalize on the move or the USD/CAD pair continues with its break through the 1.2800 mark amid absent economic releases from the US or Canada. Hence, the market focus will remain on geopolitical developments, which will influence oil price dynamics. Apart from this, traders will take cues from the broader market risk sentiment. This, along with the US bond yields, will drive the USD demand and provide some impetus to the USD/CAD pair.

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