USD/CAD spikes to 1.2930-35 area amid weaker oil prices, broad-based USD strength

• A combination of factors assisted USD/CAD to regain strong positive traction on Tuesday.
• Sliding oil prices undermined the loonie and extended support amid aggressive USD buying.
• Hawkish Fed expectations, recession fears continued underpinning the safe-haven greenback.

The USD/CAD pair attracted fresh buying in the vicinity of the 50-day SMA on Tuesday and rallied nearly 100 pips from the daily low, around the 1.2840 region. The momentum lifted spot prices back to the 1.2930-1.2935 area during the first half of the European session and was sponsored by a combination of factors.

Crude oil prices came under renewed selling pressure and snapped a two-day winning streak to a four-day high amid the worsening global economic outlook, which could stall fuel demand recovery. This, in turn, undermined the commodity-linked loonie and provided a goodish lift to the USD/CAD pair amid the emergence of aggressive US dollar buying.

The Federal Reserve’s non-stop chatter about rate hikes to curb soaring inflation turned out to be a key factor that continued lending support to the USD. In fact, Fed Chair Jerome Powell said last week that the US central bank remains focused on getting inflation under control and that the US economy is well-positioned to handle tighter policy.

Apart from this, an intraday turnaround in the equity markets pushed the safe-haven greenback to a fresh 20-year peak. The early optimism led by reports that US president Joe Biden was leaning toward a decision on easing tariffs on goods from China faded quickly amid worries about a recession, which continued weighing on investors' sentiment.

The fundamental backdrop supports prospects for additional gains, though bulls might prefer to wait for a fresh catalyst from the FOMC meeting minutes, due for release on Wednesday. Apart from this, traders will take cues from Friday's release of the monthly jobs report from the US and Canada to determine the near-term trajectory for the USD/CAD pair.

Technical levels to watch