USD/CAD rebounds swiftly from one-month low, climbs back above mid-1.2600s

• A combination of supporting factors assisted USD/CAD to reverse an early dip to a one-month low.
• Retreating oil prices undermined the loonie and remained supportive amid resurgent USD demand.

The USD/CAD pair rallied over 50 pips from over one-month low touched during the mid-European session and jumped to the 1.2665 region, or a fresh daily high in the last hour.

Having shown some resilience below the 100-day SMA, the USD/CAD pair staged a goodish intraday bounce from the 1.2610 region on Monday and was supported by a combination of factors. Crude oil prices edged lower for the second successive day and moved further away from a near two-month high touched on Friday. This, in turn, undermined the commodity-linked loonie and acted as a tailwind for the major amid a strong pickup in the US dollar demand.

The greenback made a solid comeback on the first day of a new week amid elevated US Treasury bond yields, bolstered by the prospects for a faster policy tightening by the Fed. In fact, the money markets have fully priced in the possibility of an eventual lift-off in March and anticipate four interest rate hikes by the end of 2022. This, in turn, continued pushing the US Treasury bond yields higher and extended some support to the greenback.

Meanwhile, a prolonged sell-off in the US bond markets tempered investors' appetite for perceived riskier assets, which was evident from the prevalent cautious mood around the equity markets. This was seen as another factor that benefitted the greenback's relative safe-haven status and provided an additional boost to the USD/CAD pair. It, however, remains to be seen if bulls are able to capitalize on the move amid absent relevant fundamental catalyst.

Moreover, investors might also refrain from placing aggressive bets and wait on the sidelines ahead of this week's important event/data risks, starting with Fed Chair Jerome Powell's testimony on Tuesday. This will be followed by the US consumer inflation figures on Wednesday and the US monthly Retail Sales data on Friday. Apart from this, the US bond yields will influence the USD, which along with oil price dynamics would provide a fresh impetus to the USD/CAD pair.

Technical levels to watch