USD/CAD slides below 1.3000 mark amid rebounding oil prices, modest USD weakness

The USD/CAD pair maintained its offered tone through the early European session and slipped below the 1.3000 psychological mark, hitting a fresh daily  |  07/07/2022 08:24
  • USD/CAD witnessed some selling on Thursday and was pressured by a combination of factors.
  • Rebounding oil prices underpinned the loonie and exerted pressure amid a modest USD pullback.
  • Recession fears could cap oil prices; Fed rate hike bets to lend support to the USD and the pair.

The USD/CAD pair slipped below the 1.3000 psychological mark, hitting a fresh daily low in the last hour, on the back of a stronger Canadian dollar, fuelled by rebounding oil prices.

The decline was helped by a marginally weaker US dollar which paused its recent strong bullish run and eased a bit from a fresh two-decade high touched the previous day amid a slight improvement in the risk sentiment.

A modest bounce in crude oil prices - bolstered by concerns about tight global supplies - underpinned the loonie and exerted downward pressure on the USD/CAD pair. This comes on the back of this week's failures near the 1.3075-1.3085 area and marks a near-term bearish breakdown.

That said, growing fears of a global recession, along with fresh Covid-19 lockdowns in China, have raised concerns about the fuel demand outlook that might cap oil prices. Furthermore, the worsening economic outlook should keep a lid on any optimistic move in the markets. Apart from this, the prospects for more aggressive Fed rate hikes should act as a tailwind for the safe-haven buck and lend support to the USD/CAD pair, warranting some caution for bearish traders.

Expectations that the Fed would stick to its faster policy tightening path were reaffirmed by the unsurprisingly hawkish minutes of the June 14-15 FOMC meeting, released on Wednesday. Policymakers emphasized the need to fight inflation even if it meant slowing an economy and indicated that another 50 or 75 bps rate hike is likely at the July meeting. This, in turn, favours the USD bulls and supports prospects for the emergence of some dip-buying around the USD/CAD pair.

Hence, it will be prudent to wait for strong follow-through selling before confirming that spot prices have topped out and positioning for a deeper corrective pullback. Traders now look forward to the US Weekly Initial Jobless Claims. This, along with Fed Governor Christopher Waller and St. Louis Fed President James Bullard's scheduled speeches, will influence the USD. Apart from this, oil price dynamics should produce short-term trading opportunities around the USD/CAD pair.

Technical levels to watch

 

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