USD/CAD flirts with daily low, around mid-1.2900s amid softer USD/uptick in oil prices

• A combination of factors dragged USD/CAD lower for the third successive day on Tuesday.
• Receding bets for a 100 bps Fed rate hike move in July kept the USD bulls on the defensive.
• The overnight rally in oil prices underpinned the loonie and contributed to the selling bias.

The USD/CAD pair struggled to capitalize on the overnight goodish rebound from sub-1.2900 levels, or a nearly two-week low and met with a fresh supply on Tuesday. The pair maintained its offered tone through the early European session and was seen trading near the daily low, around mid-1.2900s.

The US dollar languished just above a one-week low touched on Tuesday amid diminishing odds for a 100 bps rate hike by the Federal Reserve at the upcoming meeting on June 26-27. It is worth recalling that several FOMC members said last week that they were not in favour of a bigger rate increase that the markets priced in following the release of red-hot US consumer inflation.

Subdued USD price action, along with continued worries about tight global supply, assisted crude oil prices to preserve the overnight strong gains to a multi-day high. This, in turn, underpinned the commodity-linked loonie and dragged the USD/CAD pair lower for the third successive day. That said, a combination of factors might hold back bearish traders from placing aggressive bets.

Investors remain concerned that surging crude will feed into a demand-killing recession, which should act as a headwind for the black liquid. Furthermore, market participants seem convinced that the recent surge in US consumer inflation to a four-decade high in June would force the Fed to deliver a larger rate hike later in the year. This should limit the downside for the USD.

Even from a technical perspective, the emergence of fresh buying at lower levels adds credence to the near-term positive outlook. Hence, it will be prudent to wait for sustained weakness below the 1.2900 round-figure mark before confirming that the USD/CAD pair has topped out in the near term. This would set the stage for an extension of the recent pullback from the YTD peak.

Market participants now look forward to the US housing market data - Building Permits and Housing Starts - due later during the early North American session. The data might influence the USD demand, which along with oil price dynamics, should provide some impetus to the USD/CAD pair.

Technical levels to watch