• A combination of factors dragged USD/CAD to over a one-month-low on Monday.
• Bullish oil prices underpinned the loonie and exerted pressure amid a weaker USD.
• The Fed’s expected rate hike path, the risk-on mood weighed heavily on the buck.

The USD/CAD pair witnessed heavy selling for the third successive day on Monday and continued losing ground through the mid-European session. The downward trajectory dragged spot prices to the 1.2675 region, or its lowest level since April 22 and was sponsored by a combination of factors.

Expectations of demand recovery in China, along with global supply concerns amid the impending European Union embargo on Russian oil imports pushed the black liquid to over a two-month high. This, in turn, underpinned the commodity-linked loonie and dragged the USD/CAD pair lower for the third successive day amid sustained US dollar selling bias.

Expectations that the Fed Fed could pause the rate hike cycle after two 50 bps hikes each in June and July forced traders to continue cutting their long US dollar positions. The prospects for an eventual slowdown of the Fed's policy tightening was evident from the recent slump in the US Treasury bond yields to a multi-week high, which weighed on the buck.

Apart from this, the prevalent risk-on environment further dented demand for the safe-haven greenback and exerted additional downward pressure on the USD/CAD pair. Investors turned optimistic amid hopes that the easing of COVID-19 lockdowns in China could boost the global economy, which was evident from a generally positive tone around the equity markets.

With the latest leg down, the USD/CAD pair broke through the 1.2700 confluence support comprising 100-day SMA and the 61.8% Fibonacci retracement level of the 1.2459-1.3077 strong move up. The subsequent slide could be seen as a fresh trigger for bearish traders and supports prospects for an extension of the recent pullback from the YTD peak touched earlier this month.

That said, relatively lighter trading volumes on the back of the Memorial Day holiday in the US warrant some caution before placing aggressive bearish bets. Hence, any further downfall is more likely to find decent support near a technically significant 200-day SMA, currently around the 1.2660-1.2655 region, which should now act as a pivotal point.

Technical levels to watch