USD/CAD pares intraday gains, back below 1.2800 mark amid weaker USD/uptick in oil prices

• USD/CAD trimmed a part of its intraday gains and was pressured by a combination of factors.
• Modest uptick in crude oil prices underpinned the loonie and capped gains amid a weaker USD.
• The risk-off mood, aggressive Fed rate hike bets limited the USD losses and extended support.

The USD/CAD pair struggled to capitalize on its goodish bounce from a near three-week low set earlier this Tuesday and was seen trading below the 1.2800 mark heading into the North American session.

The impending European Union ban on Russian oil imports continued fueling concerns about tightening global supply. Adding to this, hopes for demand recovery in China assisted crude oil prices to reverse modest intraday losses. This, in turn, underpinned the commodity-linked loonie and acted as a headwind for the USD/CAD pair amid the emergence of fresh selling around the US dollar.

In fact, the key USD Index dropped to a nearly one-month low amid strong pickup in the shared currency, which gained traction in reaction to hawkish comments by the European Central Bank (ECB) policymakers. That said, the prevalent risk-off environment - amid the worsening global economic outlook - helped limit losses for the safe-haven buck and extended some support to the USD/CAD pair.

Investors remain worried that a more aggressive move by major central banks to curb soaring inflation could pose challenges to the global economy. Adding to this, the Russia-Ukraine war and the latest COVID-19 outbreak in China have been fueling recession fears. This, in turn, kept a lid on the overnight optimistic move in the markets and benefitted traditional safe-haven assets.

Apart from this, expectations that the US central bank would need to take more drastic action to bring inflation under control held back traders from placing aggressive USD bearish bets. Hence, the focus will remain glued to Fed Chair Jerome Powell's speech later during the early North American session and the latest FOMC meeting minutes, scheduled for release on Wednesday.

A 50 bps Fed rate hike move over the next two meetings is already priced in, suggesting that market participants will look for clues about the possibility of a jumbo 75 bps rate hike in June. This, in turn, will play a key role in driving the USD demand in the near term and assist traders to determine the next leg of a directional move for the USD/CAD pair.

In the meantime, traders will take cues from the US economic docket - featuring the releases of the flash PMI prints for May, New Home Sales and Richmond Manufacturing Index. This, along with the broader market risk sentiment, will drive the USD demand. Apart from this, oil price dynamics should allow traders to grab short-term opportunities around the USD/CAD pair.

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