USD/CAD approaches weekly high, around mid-1.2700s amid stronger USD/sliding oil prices

• USD/CAD gained traction for the second straight day and was supported by a combination of factors.
• Weaker oil prices undermined the loonie and provided a modest lift amid a broad-based USD strength.
• Rising bets for a 50 bps Fed rate hike in March, the risk-off impulse benefitted the safe-haven buck.

The USD/CAD pair maintained its offered tone through the early European session and was last seen hovering near the top end of its weekly trading range, just below mid-1.2700s.

A combination of supporting factors assisted the USD/CAD pair to build on the overnight solid rebound from an over two-week low and gain traction for the second successive day on Friday. A softer tone around crude oil prices undermined the loonie and remained supportive of the move amid a broad-based US dollar strength.

As investors await the outcome of US-Iran talks, expectations that the revival of the 2015 nuclear agreement could return more than 1 million barrels per day of Iranian oil in the markets weighed on the black gold. Apart from this, the risk-off impulse prompted traders to lighten their bullish bets around the commodity.

Meanwhile, the USD continued drawing support from rising bets for a 50 bps Fed rate hike in March, reaffirmed by Thursday's red-hot US consumer inflation figures. Adding to this, St. Louis Fed President James Bullard said that the US central bank should hike rates by 100 basis points over the next three meetings.

Growing acceptance that the Fed will adopt a more aggressive policy response to combat high inflation tempered investors' appetite for riskier assets. This was evident from a weaker tone around the equity markets, which was seen as another factor that benefitted the safe-haven buck and extended support to the USD/CAD pair.

The fundamental backdrop seems tilted firmly in favour of bullish traders and supports prospects for additional gains for the USD/CAD pair. That said, it will still be prudent to wait for sustained strength beyond last week's swing high, around the 1.2785 region before positioning for any further near-term appreciating move.

Market participants now look forward to the release of the Prelim University of Michigan US Consumer Sentiment Index. This, along with the US bond yields, will influence the USD. Traders will further take cues from oil price dynamics for some short-term opportunities around the USD/CAD pair on the last day of the week.

Technical levels to watch