USD/CAD hits 1-1/2 week high amid modest USD strength, seems poised to climb further

• USD/CAD scales higher for the second straight day and climbs to over a one-week high.
• The USD stands firm near the monthly peak and continues to act as a tailwind for the pair.
• The recent slump in oil prices undermines the loonie and remains supportive of the move.

The USD/CAD pair gains traction for the second successive day on Wednesday and climbs to a one-and-half-week high during the early European session. The pair is currently placed just below mid-1.2900s and is now looking to build on its recent bounce from a two-month low touched last week.

The US dollar stands tall near the monthly peak and turns out to be a key factor acting as a tailwind for the USD/CAD pair. Despite signs of easing US inflation, investors seem convinced that the Fed would stick to its policy tightening path. The bets were reaffirmed by Wednesday's release of mostly upbeat consumer spending data from the US. Furthermore, the minutes of the July 26-27 FOMC meeting indicated that the US central bank would not consider pulling back on interest rate hikes until inflation came down substantially.

Hawkish Fed expectations remain supportive of elevated US Treasury bond yields. Apart from this, a softer risk tone and growing recession fear further offer support to the safe-haven buck. Meanwhile, concerns that a global economic downturn could hurt fuel demand dragged crude oil prices to a six-month low earlier this week. This continues to undermine the commodity-linked loonie and provides an additional lift to the USD/CAD pair. The fundamental backdrop favours bullish traders and supports prospects for additional gains.

Even from a technical perspective, sustained strength and acceptance above the 1.2900 round-figure mark add credence to the constructive outlook. Hence, a subsequent move back towards the monthly swing high, around the 1.2985 region, aen route to the 1.3000 psychological mark, now looks like a distinct possibility. Traders now look forward to the US economic docket - featuring the release of the Philly Fed Manufacturing Index, the usual Weekly Initial Jobless Claims and Existing Home Sales data - for short-term opportunities.

Technical levels to watch