USD/CAD sticks to modest gains amid sliding oil prices, weaker USD continues to cap

The USD/CAD pair regains some positive traction on Tuesday and reverses a part of the previous day's sharp decline. The pair maintains its bid tone around the 1.2860 region through the first half of the European session, though the uptick lacks bullish conviction.

The emergence of fresh selling around crude oil prices undermines the commodity-linked loonie, which, in turn, offers some support to the USD/CAD pair. Investors remain worried that a global economic slowdown could hit fuel demand. Furthermore, the latest progress to revive the Iran nuclear accord might clear the way to boost crude supply in a tight market and exerts some downward pressure on the black liquid. That said, a softer tone surrounding the US dollar keeps a lid on any meaningful upside for the major.

A generally positive risk tone continues to weigh on the safe-haven greenback, though expectations that the Fed would stick to its aggressive policy tightening path should help limit losses. In fact, the market pricing indicates a 70% chance of a 75 bps Fed rate hike at the September meeting, bolstered by Friday's blockbuster US jobs report. Adding to this, Fed Governor Michelle Bowman said on Saturday that the US central bank should consider more 75 bps hikes at coming meetings to bring inflation back down.

Hence, the market focus would remain glued to the US consumer inflation figures, due for release on Wednesday. The US CPI report will provide fresh clues about the Fed's near-term policy outlook, which will play a key role in driving the near-term USD demand. In the meantime, traders might refrain from placing aggressive bets amid absent relevant market-moving economic releases on Tuesday, either from the US or Canada. This warrants caution before placing aggressive bullish bets around the USD/CAD pair.

Technical levels to watch