USD/CAD clings to gains near 1.2820-25 region amid retreating crude oil prices

• USD/CAD defended the 1.2800 mark and staged a modest bounce on the last day of the week.
• Retreating oil prices undermined the loonie and provided a modest intraday boost to the pair.
• Subdued USD price action failed to impress amid the end-of-year thin liquidity in the markets.

The USD/CAD pair maintained its bid tone through the early European session and was last seen hovering near the top end of the daily trading range, around the 1.2820-25 region.

The pair attracted some buying near the 1.2800 mark on Friday and for now, seems to have stalled the recent pullback from the YTD top touched on the first day of the current week. Crude oil prices snapped a three-day rally and witnessed a modest pullback from a one-month high. This, in turn, undermined the commodity-linked loonie and provided a modest lift to the USD/CAD pair.

The uptick, however, lacked bullish conviction and remained limited amid subdued US dollar demand. The optimism led by reports that the new Omicron variant of the coronavirus might be less severe than feared boosted investors' confidence. This was evident from the risk-on rally in the equity markets, which continued weighing on traditional safe-haven currencies, including the greenback.

That said, the Fed's hawkish outlook, indicating three rate hikes in 2022, acted as a tailwind for the buck. The market expectations were reaffirmed by strong US inflation data released on Thursday. In fact, the Fed's preferred inflation gauge – the Personal Consumption Expenditures (PCE) Price Index – accelerated to 5.7% YoY in November, marking the largest annual growth since 1982.

The fundamental backdrop seems tilted in favour of the USD bulls. Even from a technical perspective, the USD/CAD pair has been trending higher along an upward sloping channel over the past two months or so. This, in turn, suggests that the path of least resistance for the USD/CAD pair is to the upside, though the year-end thin liquidity could hold back traders from placing fresh bullish bets.

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