USD/CAD recovers from two-month low, flits with 200-DMA around 1.2600 mark

• USD/CAD gained some positive traction on Wednesday and snapped six days of the losing streak.
• The intraday recovery from the two-month low was fueled by modest pickup in the USD demand.
• Rising oil prices underpinned the loonie and might keep a lid on any meaningful gains for the pair.

The USD/CAD pair held on to its intraday gains heading into the North American session and was last seen trading near the daily high, around the 1.2600 round-figure mark.

The pair staged a modest recovery from the two-month low, around the 1.2565 region touched earlier this Wednesday and for now, seems to have snapped six successive days of the losing streak. The uptick was sponsored by the emergence of some US dollar buying, though rising crude oil prices underpinned the commodity-linked loonie and acted as a headwind for the USD/CAD pair.

The USD drew support from the recent blowout rally in the US Treasury bond yields, bolstered by the Fed's hawkish outlook. In fact, the Fed indicated last week that it could raise rates at all the six remaining meetings in 2022. Adding to this, Fed Chair Jerome Powell suggested that the US central bank could adopt a more aggressive policy response to combat high inflation.

Moreover, San Francisco Fed President Mary Daly noted that it was time to remove policy accommodation, while St. Louis Fed President James Bullard and Cleveland’s Loretta Mester called for faster hikes. The markets started pricing in a 50 bps rate hike at the next FOMC meeting and pushed the yield on the benchmark 10-year US government bond yield to the highest level since 2019.

Apart from this, the lack of progress in the Russia-Ukraine peace talks kept investors on the edge and benefitted the safe-haven buck. Italy's Prime Minister Mario Draghi noted that Russia is not showing interest in a truce for successful peace talks. Separately, Russian Foreign Minister Sergei Lavrov said that talks with Ukraine are difficult as Kyiv is constantly changing its position.

This, along with the disruption of Russian and Kazakh crude exports via the Caspian Pipeline Consortium (CPC), boosted crude oil prices and extended some support to the Canadian dollar. Given this week's sustained break and acceptance below the very important 200-day SMA, this might hold back traders from placing aggressive bullish bets around the USD/CAD pair and cap the upside.

Hence, it will be prudent to wait for strong follow-through buying before confirming that the recent pullback from the 1.2900 mark, or the YTD top has run its course. In the absence of any relevant economic data, the US bond yields and the broader risk sentiment will influence the USD. Traders will further take cues from oil price dynamics for some short-term opportunities around the USD/CAD pair.

Technical levels to watch