• USD/CAD falls for the second day in a row amid the emergence of new USD selling.
  • Driving down US bond yields, the risk impulse is putting some pressure on the safe-haven dollar.
  • Bets on aggressive Fed rate hikes should limit USD losses and support the major.

USD/CAD is attracting further selling after an early rally to the 1.3025 region and falling for the second day in a row on Tuesday. The downward trajectory takes spot prices towards the 1.2975 area at the start of the European session and is sponsored by a combination of factors.

Speculation that major producers may cut production to block the recent drop in crude oil prices is helping the black liquid hold near the upper end of the monthly range. This, in turn, underpins the commodity loonie. Apart from that, the emergence of further US dollar selling is contributing to the corrective pullback in USD/CAD from a multi-week high hit the previous day.

A further pullback in US Treasury bond yields, along with the risk impulse, pushes the safe-haven USD further away from a new 20-year high set on Monday. That said, strengthening expectations that the Fed will stick to a more aggressive policy tightening path should limit USD losses. In fact, markets are currently pricing in a higher probability of a 75 basis point Fed rate hike in September.

The bets were reaffirmed by more hawkish remarks from Fed Chairman Jerome Powell on Friday, signaling that interest rates would be kept higher for longer to bring inflation down. In addition, fears that a deeper global economic slowdown will weigh on fuel demand and hopes of a return of sanctioned Iranian exports should cap crude oil prices, which, in turn, should support the USD/ CAD.

The fundamental backdrop favors bullish traders, warranting caution before confirming that the recent rebound from the all-important 200-day SMA has run out of steam. Market players are now turning their attention to the US economic calendar – with JOLTS job postings and the Conference Board’s Consumer Confidence Index. This, combined with the momentum in oil prices, could give the USD/CAD pair some momentum.

Technical levels to watch