USD/CAD keeps the red on softer USD, downside remains cushioned amid sliding oil prices

The USD/CAD pair meets with a fresh supply on Tuesday and maintains its offered tone through the first half of the European session. The pair, however, recovers a few pips from the daily low and is currently trading comfortably above the 1.3100 round-figure mark.

A recovery in the global risk sentiment - as depicted by a generally positive tone around the equity markets - drags the safe-haven US dollar away from a two-decade high touched on Monday. This turns out to be a key factor exerting some downward pressure on the USD/CAD pair. That said, a sharp fall in crude oil prices undermines the commodity-linked loonie and offers some support to spot prices.

Oil prices come under renewed selling pressure and drop back closer to a multi-month low touched last week. An OPEC+ deal to cut output by 100,000 barrels per day in October was seen as a symbolic move. This, along with worries that a global economic downturn and COVID-19 curbs in China will dent fuel demand, overshadows concerns over tight global supply and weighs heavily on the black liquid.

Furthermore, rising US Treasury bond yields, bolstered by hawkish Fed expectations, support prospects for the emergence of some USD dip-buying and should limit losses for the USD/CAD pair. Investors seem convinced that the Fed will stick to its aggressive policy tightening path to tame inflation and have been pricing in a greater chance of a supersized 75 bps at the September FOMC policy meeting.

The fundamental backdrop suggests that the path of least resistance for the USD/CAD pair is to the upside and any meaningful slide might still be seen as a buying opportunity. Traders, however, might prefer to move to the sidelines ahead of the Bank of Canada meeting on Wednesday. In the meantime, the US ISM Services PMI might provide some impetus later during the early North American session.

Technical levels to watch