USD/CAD flirts with monthly peak, bulls await sustained strength beyond 1.3000 mark

• A goodish pickup in the USD demand assisted USD/CAD to gain traction for the second straight day.
• Declining US bond yields and the risk-on impulse held back the USD bulls from placing fresh bets.
• Rising crude oil prices underpinned the loonie and kept a lid on any meaningful upside for the pair.

The USD/CAD pair gained some positive traction for the second successive day on Friday and inched back closer to a one-month high touched earlier this week, though lacked follow-through. The pair was last seen trading around the 1.2970-1.2975 region, just a few pips below the daily peak touched during the early part of the European session.

The US dollar was back in demand on Friday and drew some support from growing market acceptance that the Fed would stick to its aggressive policy tightening path to curb soaring inflation. The bets were reaffirmed by the Fed's so-called dot plot, which showed that the median projection for the federal funds rate stood at 3.4% for 2022 and 3.8% in 2023. This assisted the USD to stall this week's sharp retracement slide from a two-decade, which, in turn, acted as a tailwind for the USD/CAD pair.

Investors, however, took comfort from the fact that the Fed forecasted the rate to decline to 3.4% in 2024 and 2.5% over the long run. This was evident from the ongoing decline in the US Treasury bond yields, which, along with the risk-on impulse, held back the USD bulls from placing aggressive bets. Apart from this, a goodish pickup in crude oil prices underpinned the commodity-linked loonie and further contribute to capping any meaningful upside for the USD/CAD pair, at least for the time being.

Even from a technical perspective, spot prices, so far, have struggled to make it through the 1.3000 psychological mark. This makes it prudent to wait for sustained move beyond the said handle before positioning for an extension of the recent strong rally witnessed over the past one-and-half-week or so. Traders now eye the US economic docket, featuring Industrial Production and Capacity Utilization Rate. This, along with the USD/oil price dynamics should provide some impetus to the USD/CAD pair.

Technical levels to watch