- USD/CAD trimmed some of its intraday gains and came under pressure from a combination of factors.
- The modest rebound in crude oil prices underpinned the loonie and capped gains amid a weaker USD.
- Risk-off mood, aggressive Fed rate hike bets capped USD losses and extended support.
The pair USD/CAD struggled to capitalize on its nice rebound from a nearly three-week low set earlier this Tuesday and was seen trading below 1.2800 heading into the American session.
The European Union’s looming ban on Russian oil imports continued to fuel concerns about shrinking global supply. Added to this, hopes of a demand recovery in China helped crude oil prices reverse modest intraday losses. This, in turn, supported the commodity-linked Canadian dollar and acted as a headwind for the USD/CAD pair amid fresh selling around the US dollar.
Indeed, the key USD index fell to a nearly one-month low amid a strong rally in the common currency, which gained momentum in reaction to aggressive comments from European Central Bank (ECB) policymakers. That said, the prevailing environment of risk aversion, amid the worsening global economic outlook, helped limit losses for the safe-haven dollar and extended some support to the USD/CAD pair.
Investors remain concerned that a more aggressive move by major central banks to curb runaway inflation could pose challenges for the global economy. Adding to this, the war between Russia and Ukraine and the latest outbreak of COVID-19 in China have been fueling recession fears. This, in turn, kept the bullish overnight move in the markets at bay and benefited traditional safe-haven assets.
Apart from this, expectations that the US central bank would need to take more drastic measures to rein in inflation prevented traders from making aggressive bearish bets on USD. Therefore, the focus will remain glued to Fed Chairman Jerome Powell’s speech later during the first North American session and the latest FOMC meeting minutes, due for release on Wednesday.
A 50bp Fed rate hike has already been priced in over the next two meetings, suggesting that market participants will be looking for clues about the possibility of a massive 75bp rate hike in June. This, in turn, will play a key role in driving short-term USD demand and help traders determine the next leg of a directional move for the USD/CAD pair.
Meanwhile, traders will follow the indications of the US economic docket, with the release of preliminary printouts of the May PMI, New Home Sales and the Richmond Manufacturing Index. This coupled with broader market risk sentiment will drive demand for 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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