USD/CAD Bullish as Oil Prices Crash—Loonie on the Backfoot

The USD/CAD pair traded on a bullish path in the London session on Tuesday, as the currency pair hit a one-week high at 1.2871. However, the pair appears to have run out of bullish steam as it spiraled towards the 1.2820 amid a mild weakness in the US dollar.

Modest optimism over the progressing peace talks between Russia and Ukraine, alongside weaker US Treasury bond yields, triggered some outflow from the USD and capped today’s gains for the USD/CAD pair.

Factors Influencing the Near-Term Price Dynamics of the USD/CAD Pair

That said, a sustained downward push in the near term seems unlikely considering the crash in oil prices, which typically thwarts demand for the commodity-tied loonie. The prevailing optimism over the progress of peace talks between Russia and Ukraine exerted some bearish pressure in the black liquid as it fell to a three-week low.

Meanwhile, the US Federal Reserve is expected to announce a policy tightening cycle tomorrow. This served as a support for the weakened greenback. Analysts believe that the prevailing geopolitical developments might not be trading enough for the Fed to hold off a rate hike.

The current fundamental setting favors a near-term bullish outlook on the USD/CAD pair. Nonetheless, traders will likely remain on the sidelines and avoid placing aggressive bets ahead of the outcome of the two-day FOMC policy meeting beginning tomorrow. Furthermore, market participants will continue to observe developments around the ongoing geopolitical crisis for clues.

Finally, traders will look to the US economic docket this week, which features the release of the Producer Price Index and Empire State Manufacturing Index, for near-term trading cues. Traders will also look at the US bond yields and the broader market risk sentiment, which hold significant influence on the greenback, for clues. Also, the prevailing oil price dynamics should add to short-term market cue indicators for the loonie and the USD/CAD pair.