USD/CAD recovers from two-week lows, trades around 1.2600

• USD/CAD recovers from two-month low, jumps off 200 DMA around 1.2600
• USD/CAD gained some positive traction on Wednesday and snapped a six-day losing streak.
• The intraday recovery from the two-month low was fueled by a modest pickup in USD demand.
• Rising oil prices underpinned the loonie and could limit any significant gains for the pair.

The pair USD/CAD it maintained its intraday gains heading into the American session and was last seen trading near the daily high around 1.2600.

The pair staged a modest recovery from the two-month low, around the 1.2565 region touched on Wednesday, and for now appears to have broken six straight days of losing streak. The rally was sponsored by the appearance of some US dollar buying, although rising crude oil prices underpinned the commodity-linked Canadian dollar and acted as a headwind for the USD/CAD pair.

The USD gained support from the recent rally in US Treasury yields, fueled by the dovish outlook from the Federal Reserve. In fact, the Fed indicated last week that it could raise rates at the remaining six meetings in 2022. Adding to this, Fed Chairman Jerome Powell suggested that the US central bank could adopt a policy response more aggressive to combat high inflation.

Additionally, San Francisco Fed President Mary Daly signaled it was time to end accommodative policy, while St. Louis Fed President James Bullard and Loretta Mester of Cleveland called for faster hikes. Markets began to price in a 50bps rate hike at the next FOMC meeting and pushed the benchmark 10-year US government bond yield to the highest level since 2019.

Aside from this, the lack of progress in the Russia-Ukraine peace talks kept investors on edge and benefited the safe-haven dollar. Italian Prime Minister Mario Draghi pointed out that Russia shows no interest in a truce for the success of the peace talks. Separately, Russian Foreign Minister Sergei Lavrov said talks with Ukraine are difficult as kyiv constantly changes position.

.This, along with the halt of Russian and Kazakhstan crude exports through the Caspian Pipeline Consortium (CPC), boosted crude prices and extended some support to the Canadian dollar. Given this week’s sustained breakout and acceptance below the very important 200-day SMA, this could prevent traders from placing aggressive bullish bets on the USD/CAD pair and limit the uptrend.

Therefore, it will be prudent to wait for strong follow-on buying before confirming that the recent pullback from 1.2900, or yearly highs, has run its course. In the absence of relevant economic data, US bond yields and broader risk sentiment will weigh on the USD. Traders will take more account of oil price dynamics for some short-term opportunities around the USD/CAD pair.