USD/CAD pares intraday gains, downside remains cushioned amid slump in oil prices

USD/CAD struggled to preserve its modest gains to a multi-day high amid weaker USD.
Softer US bond yields, hopes for diplomacy in Ukraine weighed on the safe-haven buck.
A slump in oil prices undermined the loonie and helped limit the downside for the major.
The USD/CAD pair surrendered a major part of its intraday gains to a multi-day peak and was last seen trading just a few pips above the daily low, around the 1.2830-1.2825 region.

The pair gained some positive traction during the first half of the trading on Tuesday, though the intraday uptick ran out of steam near the 1.2870 region amid modest US dollar weakness. Hopes of progress in peace talks between Ukraine and Russia, along with softer US Treasury bond yields, prompted some USD profit-taking and capped the early uptick for the USD/CAD pair.

The pair retreated around 40 pips from the daily swing high, though the downside seems cushioned amid a slump in crude oil prices, which tend to undermine the commodity-linked loonie. The latest optimism over the possibility of a diplomatic solution to end the war in Ukraine helped ease fears of supply disruption and dragged the black liquid to its lowest in almost three weeks.
Adding to this, expectations that the Fed would announce an imminent start of policy tightening cycle on Wednesday acted as a tailwind for the US bond yields and the greenback. The markets seem convinced that the recent geopolitical developments might do little to hold back the US central bank from hiking its target funds rate to rein in inflationary expectations.

The fundamental backdrop favours bullish traders and supports prospects for a further near-term appreciating move for the USD/CAD pair. That said, traders might refrain from placing aggressive bets and prefer to wait for the outcome of a two-day FOMC policy meeting on Wednesday. In the meantime, geopolitical developments will be looked upon for some impetus.

Next on tap is the US economic docket, featuring the release of the Producer Price Index and Empire State Manufacturing Index. Traders will further take cues from the US bond yields and the broader market risk sentiment, which will influence the USD. Apart from this, oil price dynamics should allow traders to grab short-term opportunities around the USD/CAD pair.