USD/CAD sticks to modest gains above mid-1.2700s, awaits fresh geopolitical developments

• USD/CAD continued with its struggle to build on the momentum or find acceptance above 1.2800.
• Signs of stability in the markets, sliding US bond yields failed to assist the USD to preserve its gains.
• Retreating crude oil prices undermined the loonie and continued lending some support to the pair.

The USD/CAD pair retreated nearly 50 pips from the daily high and was last seen trading around the 1.2765-1.2760 region, still up over 0.45% for the day.

The pair opened with a bullish gap on the first day of a new week and gained some positive traction during the early part of the trading, albeit struggled to find acceptance above the 1.2800 mark. The initial signs of stability in the financial markets, along with a sharp slide in the US Treasury bond yields failed to assist the safe-haven US dollar to preserve its intraday gains. This, in turn, was seen as a key factor that acted as a tailwind for the USD/CAD pair.

The nervousness over the worsening situation in Ukraine eased after the Russian negotiator said that they are interested to reach an agreement with Ukraine as soon as possible. This was evident from modest recovery across the global equity markets, which dented demand for traditional safe-haven assets, including the greenback. Apart from this, the diminishing odds for a 50 bps Fed rate hike move in March further held back the USD bulls from placing aggressive bets.

The recent geopolitical developments now seem to have dashed hopes for a more aggressive policy response by the Fed to combat stubbornly high inflation. This, along with the global flight to safety, triggered a fresh leg down in the US bond yields and capped the USD. That said, an intraday pullback in crude oil prices undermined the commodity-linked loonie and failed to impress bullish traders, which helped limit any meaningful slide for the USD/CAD pair.

The mixed fundamental backdrop warrants some caution before placing aggressive directional bets as the focus remains on the Ukraine-Russia dialogue, starting today at the Belarusian-Ukrainian border. The incoming headlines will influence the broader market risk sentiment and drive demand for the safe-haven USD. Apart from this, traders will take cues from oil price dynamics for some short-term impetus around the USD/CAD pair amid absent relevant economic releases.

Technical levels to watch