USD/CAD challenges 200-day SMA, around 1.3400 mark amid softer Oil prices/USD strength

• USD/CAD scales higher for the second straight day and draws support from a combination of factors.
• A modest downtick in Oil prices undermines the Loonie and acts as a tailwind amid a stronger USD.
• Bets for an imminent Fed rate-hike pause might hold back bulls from placing fresh bets and cap gains.

The USD/CAD pair attracts fresh buying following an intraday dip to the 1.3340 area and turns positive for the second straight day on Monday. Spot prices climb back closer to the 1.3400 mark during the early North American session, with bulls now awaiting a move beyond the 200-day Simple Moving Average (SMA) before positioning for an extension of Friday's bounce from a two-month low.

Crude Oil prices kick off the new week on a weaker note amid worries that a deeper global economic downturn will dent fuel demand, which, in turn, undermines the commodity-linked Loonie. The US Dollar (USD), on the other hand, recovers further from a one-year low touched on Friday amid speculations that the Federal Reserve (Fed) might continue raising interest rates. This is seen as another factor that acts as a tailwind for the USD/CAD pair and remains supportive of the intraday positive move.

In fact, the markets are currently pricing in a greater chance of another 25 bps lift-off at the next FOMC meeting in May.  The bets were lifted by the University of Michigan's preliminary report, which showed a rise in short-term inflation expectations during April. Furthermore, Fed Governor Christopher Waller on Friday called for further rate hikes and said that the job was still not done as inflation remains far too high. This continues to push the US Treasury bond yields higher and lifts the USD for the second straight day.

Investors, however, still seem convinced that the US central bank will pause its rate-hiking cycle, sooner rather than later, amid signs of easing inflationary pressures. In fact, the US CPI and the PPI report released last week indicated that disinflation is progressing smoothly. This, along with a positive risk tone, might cap the safe-haven USD and any meaningful upside for the USD/CAD pair.

Technical levels to watch