USD/CAD sticks to modest intraday gains above 1.2500, lacks bullish conviction

• Retreating oil prices undermined the loonie and assisted USD/CAD to gain traction on Friday.
• A slump in the US bond yields kept the USD bulls on the defensive and acted as a headwind.
• Investors eye Canadian Retail Sales for some impetus ahead of the Fed and BoC next week.

The USD/CAD pair maintained its bid tone heading into the European session and was last seen trading just a few pips below the daily high, around the 1.2520 region.

The pair built on the previous day's rebound from the 1.2450 support area and gained some follow-through traction on Friday amid the ongoing retracement slide in crude oil prices. An increase in US crude and fuel stockpiles prompted investors to take some profits off the table following the recent strong rally to the highest level since 2014. This, in turn, undermined the commodity-linked loonie and extended some support to the USD/CAD pair.

That said, a strong demand outlook and short-term supply disruptions assisted the black gold to trim a part of its intraday losses to the weekly low. Apart from this, speculations that the Bank of Canada could increase rates as early as next week – amid a jump in Canada’s annual inflation rate to a three-decade high in December – act as a tailwind for the Canadian dollar. This, along with subdued US dollar demand, capped the upside for the USD/CAD pair.

The greenback remained on the defensive in the wake of a further pullback in the US Treasury bond yields from multi-year highs, though a combination of factors helped limit losses. The prevalent risk-off environment, along with the prospects for an eventual Fed lift-off in March, should act as a tailwind for the buck. Investors might also refrain from placing aggressive bets heading into next week’s key central bank event risks – the Fed and BoC on Wednesday.

In the meantime, traders on Friday will take cues from the Canadian monthly Retail Sales data, due later during the early North American session. Nevertheless, the fundamental backdrop makes it prudent to wait for a strong follow-through buying before confirming that the recent pullback from 2021 high, around the 1.2965 region has run its course.

Technical levels to watch