• A combination of factors lifts USD/CAD back closer to the YTD peak on Wednesday.
• Aggressive Fed rate hike bets, rising US bond yields lift the USD to a new 20-year top.
• Bearish oil prices undermine the loonie and support prospects for additional gains.

The USD/CAD pair regains positive traction on Wednesday and climbs back closer to the YTD peak touched earlier this week. The momentum is supported by a combination of factors, with bulls now awaiting a sustained strength beyond the 1.3800 round-figure mark.

Growing acceptance that the Fed will tighten its monetary policy at a faster pace remains supportive of a further rise in the US Treasury bond yields and lifts the US dollar to a new two-decade high. Apart from this, a fresh leg down in crude oil prices undermines the commodity-linked loonie and acts as a tailwind for the USD/CAD pair.

The US central bank signalled last week that it will likely undertake more aggressive increases at its upcoming meetings to cap inflation. The overnight remarks by Fed officials reaffirms the Fed's hawkish outlook and lifts the yield on the benchmark 10-year US government bond to the 4% threshold for the first time since April 2010.

Investors, meanwhile, remain worried that Fed policy will push the economy into recession. This, along with the risk of a further escalation in the Russia-Ukraine conflict, takes its toll on the global risk sentiment. This is evident from a weaker tone around the equity markets and provides an additional lift to the safe-haven greenback.

The Canadian dollar, on the other hand, is pressured by the underlying bearish sentiment surrounding crude oil prices. Fears that a deeper economic downturn will dent fuel demand offset tight global supply concerns and continue to weigh on the black liquid. This, in turn, supports prospects for additional gains for the USD/CAD pair.

Market participants now look forward to the release of the US Pending Home Sales data, which, along with the US bond yields and the broader risk sentiment, will drive the USD demand. Apart from this, speeches by influential FOMC members, including Fed Chair Jerome Powell, and oil price dynamics should provide some impetus to the USD/CAD pair.

Technical levels to watch