USD/CAD retreats from one-week high, up little around 1.2770-75 ahead of US data

• A combination of factors failed to assist USD/CAD to find acceptance above the 1.2800 mark.
• Bullish oil prices underpinned the loonie and acted as a headwind amid subdued USD demand.
• The Fed’s hawkish outlook, elevated US bond yields should limit losses for the USD and the pair.

The USD/CAD pair retreated around 40-45 pips from the daily swing high and was last seen trading with only modest intraday gains, around the 1.2770 region.

The pair added to the previous day's hawkish FOMC minutes-inspired upward momentum and gained some follow-through traction for the second successive day on Thursday. This also marked the third day of a positive move in the previous four sessions and pushed the USD/CAD pair to a one-week high. However, a combination of factors failed to assist the major to find acceptance above the 1.2800 mark, instead attracted some sellers at higher levels.

Unrest in Kazakhstan (an OPEC+ oil producer), along with supply outages in Libya lifted crude oil prices to the highest level since November 24. Kazakhstan is experiencing the worst street protests since gaining independence three decades ago. Moreover, Libyan oil output is down due to pipeline maintenance and oilfield shutdowns. This, in turn, underpinned the commodity-linked loonie and acted as a headwind for the USD/CAD pair.

Meanwhile, signs of stability in the financial markets – as depicted by a goodish rebound in the US equity futures – dented the US dollar's relative safe-haven status. This was seen as another factor that kept a lid on any meaningful upside for the USD/CAD pair. That said, a big shift in the Fed's policy outlook and elevated US Treasury bond yields should limit losses for the greenback and lend some support to the USD/CAD pair.

In fact, the December 14-15 FOMC monetary policy meeting minutes indicated that the US central bank could hike interest rates earlier than anticipated previously to combat high inflation. The markets have started pricing in the prospects for an eventual liftoff in March. This was reinforced by the fact that the US 2-year notes, which are sensitive to rate hike expectations along with 5-year notes, jumped to a near two-year high.

Moreover, the yield on the benchmark 10-year US government bond shot to the highest level since October. This, in turn, supports prospects for the emergence of some USD dip-buying, suggesting that any meaningful slide could be seen as an opportunity to initiate fresh bullish positions around the USD/CAD pair.

Market players now look forward to the US economic docket, highlighting the usual Weekly Initial Jobless Claims and ISM Services PMI. Apart from this, the US bond yields and the broader market risk sentiment should influence the USD. Traders will further take cues from oil price dynamics to grab some short-term opportunities around the USD/CAD pair.

Technical levels to watch