USD/CAD retreats from one-week high amid weaker USD, downside seems cushioned

The USD/CAD pair struggles to capitalize on its intraday positive move to a one-week high set earlier this Wednesday and retreats to the 1.3160-1.3165 area during the first half of the European session. The pullback is sponsored by a modest US dollar weakness, though the fundamental backdrop supports prospects for the emergence of some dip-buying.

A recovery in the global risk sentiment - as depicted by a generally positive tone around the equity markets - seems to weigh on the safe-haven greenback. Apart from this, an intraday bounce in crude oil prices underpins the commodity-linked loonie and exerts some downward pressure on the USD/CAD pair. That said, growing acceptance that the Fed will stick to its aggressive policy tightening path to tame inflation should continue to act as a tailwind for the buck.

Investors started pricing in the possibility of a full 1% rate hike at the next FOMC policy meeting on September 20-21 following the release of stronger US consumer inflation data on Tuesday. This is reinforced by a fresh leg up in the US Treasury bond yields. In fact, the yield on rate-sensitive two-year US government bonds climbs to an almost 15-year high and the benchmark 10-year US Treasury note holds steady just below the YTD peak touched in June.

The prospects for faster rate hikes by the US central bank, along with economic headwinds stemming from fresh COVID-19 curbs in China, have raised concerns about a global recession. Concerns that a deeper economic downturn will dent fuel demand should keep a lid on oil prices, which, in turn, should weigh on the Canadian dollar and offer support to the USD/CAD pair.

Hence, it will be prudent to wait for strong follow-through buying before confirming that the previous day's solid recovery of over 200 pips from the vicinity of mid-1.2900s has run out of steam. Market participants now look forward to the US Producer Price Index (PPI), which, along with the US bond yields and the broader risk sentiment, will influence the USD.

Apart from this, traders will also take cues from oil price dynamics to grab short-term opportunities around the USD/CAD pair. Nevertheless, the bias still seems tilted firmly in favour of bullish traders and any intraday downfall is more likely to remain limited. Bulls, however, might wait for sustained strength beyond the 1.3200 mark before positioning for further gains.

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