USD/CAD remains depressed below 1.2500 amid bullish oil prices, downside seems limited

• A combination of factors prompted fresh selling around USD/CAD on Thursday.
• Bullish oil prices, strong Canadian CPI print continued underpinning the loonie.
• The risk-on mood weighed on the safe-haven USD and did little to lend support.
• Rising US bond yields acted as a tailwind for the USD and could help limit losses.

The USD/CAD pair edged lower through the early European session and dropped to a fresh daily low, around the 1.2480 region in the last hour.

The pair struggled to capitalize on the previous day's goodish rebound from mid-1.2400s, or over two-month low and met with a fresh supply near the 1.2525 area on Thursday. The recent bullish run-up in oil prices, along with Wednesday's stronger Canadian CPI report underpinned the commodity-linked loonie and acted as a headwind for the USD/CAD pair.

In fact, strong demand and short-term supply disruptions pushed crude oil prices to the highest level since late 2014 earlier this week. Moreover, Canada’s annual inflation rate reached a three-decade high in December, which fueled speculations that the Bank of Canada could increase rates as early as next week and further benefitted the Canadian dollar.

On the other hand, a strong recovery in the risk sentiment weighed on the safe-haven US dollar and did little to lend any support to the USD/CAD pair. That said, a fresh leg up in the US Treasury bond yields, bolstered by the prospects for an eventual Fed lift-off in March, should limit the downside for the greenback and the USD/CAD pair, at least for now.

Even from a technical perspective, bulls have been showing some resilience near the mid-1.2400s, which should now act as a pivotal point for traders. Market participants now look forward to the US economic docket – featuring the releases of Philly Fed Manufacturing Index, Weekly Initial Jobless Claims and Existing Home Sales data – for a fresh impetus.

This, along with the US bond yields and the broader market risk sentiment, will influence the buck. Apart from this, traders will take cues from oil price dynamics for some short-term opportunities around the USD/CAD pair. The key focus, however, will remain on next week's central bank event risks – the FOMC and the BoC policy decision on Wednesday.

Technical levels to watch