• USD/CAD trims some of its intraday gains, although the decline remains muted.
• Rising oil prices underpin the loonie and act as a headwind amid a modest USD pullback.
• Aggressive Fed rate hike bets favor USD bulls and should support the pair.

The pair USD/CAD is supported by Friday’s bounce from the 1.3075 area and starts the new week on a positive note. However, the pair finds it difficult to capitalize on the move and trims some of its strong intraday gains, pulling back towards 1.3150 during the first half of the European session.

Expectations that OPEC+ producers will cut output to support prices at a meeting on Monday are driving crude prices higher. This, in turn, boosts the commodity-linked loonie and acts as a headwind for the USD/CAD pair. Aside from this, a modest US dollar retracement from a fresh two-decade high attracts some sellers near the 1.3175 area.

Signs of a recovery in risk sentiment – as evidenced by the generally positive tone in equity markets – prompt some profit-taking around the safe-haven dollar. However, concerns about the deepening of the global economic recession should dampen optimism. This, coupled with aggressive expectations from the Fed, should help limit any significant corrective decline in the dollar.

Despite the monthly US employment report, investors seem convinced that the Federal Reserve will continue its aggressive tightening policy. In fact, markets are pricing in a 75 basis point rate hike at the next FOMC meeting on September 20-21. This continues to support elevated US Treasury yields and favors dollar bulls.

The fundamental backdrop suggests that the path of least resistance for the USD/CAD pair is to the upside and any significant pullback could still be seen as a buying opportunity. However, traders may refrain from making aggressive bets ahead of the OPEC meeting and amid relatively thin trading volume due to the US Labor Day holiday.

Technical levels