USD/CAD drops to over two-week low, closer to mid-1.2400 amid fresh USD selling

• A combination of factors dragged USD/CAD lower for the second straight day on Thursday.
• Strong Canadian inflation figures and an uptick in crude oil prices underpinned the loonie.
• The risk-on impulse weighed on the safe-haven USD and added to the intraday selling bias.

The USD/CAD pair edged lower through the early European session and dropped to a two-and-half-week low, around the 1.2465-1.2460 region in the last hour.

The pair added to the overnight heavy losses and witnessed some follow-through selling for the second successive day on Thursday. Against the backdrop of a hotter-than-expected Canadian CPI report released on Wednesday, an uptick in crude oil prices underpinned the commodity-linked loonie. This, along with the ongoing US dollar retracement slide from the two-year peak, exerted downward pressure on the USD/CAD pair.

The risk-on impulse - as depicted by a generally positive tone around the equity markets - turned out to be a key factor that drove flows away from the safe-haven greenback. That said, a fresh leg up in the US Treasury bond yields, bolstered by hawkish Fed expectations, should act as a tailwind for the buck and help limit losses for the USD/CAD pair. This, in turn, warrants some caution for aggressive bearish traders.

In fact, the markets seem convinced that the Fed would tighten its monetary policy at a faster pace to curb soaring inflation and have been pricing in multiple 50 bps rate hikes. The bets were reinforced by comments by a slew of influential FOMC members since the beginning of this week. Hence, the focus will remain glued to Fed Chair Jerome Powell's speech at an International Monetary Fund event later during the US session.

In the meantime, traders will take cues from the US economic docket, featuring the release of the Philly Fed Manufacturing Index and the usual Weekly Initial Jobless Claims later. This, along with the US bond yields and the broader market risk sentiment, will influence the USD and provide some impetus to the USD/CAD pair. Apart from this, oil price dynamics should allow traders to grab some short-term opportunities.

Technical levels to watch