• USD/CAD gained strong positive traction for the second successive day on Monday.
  • Fed rate hike bets, the prevalent risk-off mood boosted the safe-haven greenback.
  • An intraday pullback in oil prices undermined the loonie and remained supportive.

The USD/CAD pair built on its intraday ascent and climbed to a nearly two-week high, around the 1.2625 region heading into the North American session.

The pair attracted some dip-buying near the 1.2555 area on Monday and built on the previous session’s positive move from the very important 200-day SMA amid a broad-based US dollar strength. The markets have fully priced in the prospects for an eventual Fed lift-off in March and expect a total of four rate hikes in 202. This, along with the prevalent risk-off mood, provided a goodish lift to the safe-haven greenback and assisted the USD/CAD pair to gain traction for the second successive day.

On the other hand, an intraday pullback in crude oil prices undermined the commodity-linked loonie. This was seen as another factor that pushed the USD/CAD pair higher, taking along some short-term trading stops placed near the 1.2600 round-figure mark. Hence, the uptick could further be attributed to some technical buying. That said, any meaningful upside still seems elusive ahead of this week’s key central bank event risks – the BoC and the FOMC monetary policy decisions on Wednesday.

The markets have been speculating that the Bank of Canada could increase rates as early as this week amid a jump in Canada’s annual inflation rate to a three-decade high in December. Apart from this, escalating geopolitical tensions between Russia and Ukraine as well as in the Middle East should limit the downside for crude oil prices. The fundamental backdrop makes it prudent to wait for a strong follow-through buying before confirming that the USD/CAD pair has bottomed out already.

Market participants now look forward to the release of the flash US PMI prints (Manufacturing and Services) for a fresh impetus. This, along with the broader market risk sentiment, will drive the USD demand. Traders will further take cues from oil price dynamics to grab some short-term opportunities around the USD/CAD pair.

Technical levels to watch