USD/CAD remains on the defensive near one-week low, just above mid-1.2500s

• USD/CAD added to the previous day’s post-BoC losses and edged lower on Thursday.
• Retreating US bond yields prompted follow-through USD selling and exerted pressure.
• A softer tone around oil prices undermined the loonie and helped limit further losses.

The USD/CAD pair recovered a few pips from the one-week low touched during the early European session and was last seen trading with modest intraday losses, just above mid-1.2500s.

The pair witnessed some selling for the second straight day on Thursday and extended the previous day's sharp retracement slide from the 1.2675 region, or a near four-week high. The Canadian dollar remained well supported by a more hawkish Bank of Canada decision on Wednesday. This, along with the ongoing US dollar pullback from its highest level since May 2020, acted as a headwind for the USD/CAD pair.

The Canadian central bank, as was widely expected, raised its key interest rate by 50 bps for the first time since May 2000 and announced quantitative tightening (QT) to control spiralling inflation. The BoC said that it will unwind some of the bond purchases made during the pandemic from April 25 and that it could lift interest rates and tighten monetary policy at an accelerated pace in the months ahead.

On the other hand, the fact that the US consumer inflation figures released on Tuesday were not as bad as feared forced the US Treasury bond yields to move away from the multi-year peak and undermined the USD. Apart from this, a generally positive tone around the equity markets overshadowed expectations for a more aggressive policy tightening by the Fed and further weighed on the safe-haven greenback.

That said, a softer tone around crude oil prices kept a lid on any meaningful gains for the commodity-linked loonie and helped limit losses for the USD/CAD pair, at least for the time being. Spot prices bounced off the 1.2540 region, though lacked follow-through. This, in turn, suggests that the path of least resistance is to the downside and warrants some caution for aggressive bullish traders.

Market participants now look forward to the US economic docket - featuring monthly Retail Sales, the usual Weekly Initial Jobless Claims and Prelim Michigan Consumer Sentiment Index. This, along with the US bond yields, will influence the USD and provide some impetus to the USD/CAD pair. Traders will further take cues from oil price dynamics to grab short-term opportunities around the major.

Technical levels to watch