USD/CAD rallies to multi-week high, eyes 1.2700 mark ahead of Canadian/US data

• USD/CAD gained strong positive traction for the second successive day on Friday.
• Weaker oil prices undermined the loonie and acted as a tailwind amid stronger USD.
• Investors look forward to Canadian Retail Sales, flash US PMIs for a fresh impetus.

The USD/CAD pair added to its intraday gains and shot to its highest level since March 17, around the 1.2680 region during the first half of the European session.

A combination of factors assisted the USD/CAD pair to build on the overnight solid rebound from over a two-week low and gain strong follow-through traction for the second successive day on Friday. A softer tone around crude oil prices undermined the commodity-linked loonie. This, along with broad-based US dollar strength, acted as a tailwind for spot prices.

Investors remain worried about slowing fuel demand in the wake of COVID-19 lockdowns in China -  the world's biggest oil importer - and the prospect of weaker global growth. This, to a larger extent, overshadowed concerns about tight global supply and a potential European Union (EU) embargo on Russian gas, which, in turn, prompted fresh selling around crude oil.

On the other hand, the US dollar climbed to its highest level since March 2020 and continued drawing support from expectations for a more aggressive policy tightening by the US central bank. In fact, Fed Chair Jerome Powell all but confirmed a 50 bps rate hike at the upcoming policy meeting on May 3-4 and also hinted at consecutive increases this year.

The markets were quick to react and started pricing in three straight 50 bps rate hikes, which, in turn, pushed the rate-sensitive 5-year US government bond above 3% for the first time since 2018. The selloff in the US fixed income markets continued on Friday. This, along with the risk-off impulse, further boosted demand for the safe-haven greenback.

Market participants now look forward to the Canadian monthly Retail Sales and the flash US PMI prints for a fresh impetus during the early North American session. Apart from this, the US bond yields and the broader market risk sentiment will influence the USD. Traders will further take cues from oil price dynamics for short-term opportunities around the USD/CAD pair.

Technical levels to watch