USD/CAD trims daily gains, downside remains limited amid falling oil prices

  • USD/CAD struggled to preserve modest gains at a multi-day high amid a weaker USD.
  • Weak US Treasury yields, Ukraine diplomacy hopes weighed on the safe-haven dollar.
  • A drop in oil prices undermined the loonie and helped limit the pair’s decline.

The pair USD/CAD trimmed a significant portion of its intraday gains to multi-day highs and was last seen trading just a few pips above the daily low, around the 1.2830-1.2825 region.

The pair gained some positive traction during the first half of trading on Tuesday, although the intraday rally faded near the 1.2870 region amid modest US dollar weakness. Hopes for progress in the Ukraine-Russia peace talks coupled with weaker US Treasury yields fueled some USD profit-taking and capped the initial USD/CAD rally.

The pair pulled back around 40 pips from the daily high, though the decline appears muted amid a drop in crude oil prices, which tend to undermine the commodity-linked Canadian dollar. The latest optimism about the possibility of a diplomatic solution to end the war in Ukraine helped ease fears of a supply disruption and dragged oil to its lowest level in nearly three weeks.

Added to this, expectations that the Fed would announce an imminent start of the policy tightening cycle on Wednesday acted as a tailwind for US bond yields and the dollar. Markets seem convinced that recent geopolitical events could do little to prevent the US central bank from raising its target funds rate to rein in inflation expectations.

The fundamental backdrop favors bullish traders and supports the prospects for a further near-term appreciation move for the USD/CAD pair. That said, traders might refrain from making aggressive bets and prefer to wait for the outcome of a two-day FOMC policy meeting on Wednesday. In the meantime, geopolitical developments will be considered for some impetus.

Next on the US economic docket are the Producer Price Index and Empire State Manufacturing Index figures. Traders will take more account of US bond yields and broader market risk sentiment, which will weigh on the USD. Aside from this, the oil price dynamics should allow traders to take advantage of short-term opportunities around the USD/CAD pair.

Technical levels

Source: Fx Street

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