USD/CAD drops to 1.2600 neighbourhood, six-week low amid rallying oil prices

• USD/CAD turned lower for the second straight day and dropped to a fresh multi-week low.
• Bullish crude oil prices, hawkish BoC underpinned the loonie and dragged the pair lower.
• Geopolitical risks benefitted the safe-haven USD and could help limit any further losses.

The USD/CAD pair dropped to a six-week low during the early European session, with bears now eyeing a break below the 1.2600 round-figure mark.

The pair struggled to capitalize on its modest intraday uptick, instead met with a fresh supply near the 1.2655 region and turned lower for the second successive day on Thursday. This also marked the fourth day of a negative move in the previous five and was sponsored by strong follow-through rally in crude oil prices, which tend to benefit the commodity-linked loonie.

The imposition of harsh sanctions against Russia over its invasion of Ukraine sparked supply worries and pushed crude oil prices to a fresh multi-year high. Apart from this, the hawkish Bank of Canada decision on Wednesday also extended support to the CAD. It is worth recalling that the BoC hiked rates for the first time since October 2018 and said they would need to go higher.

On the other hand, Fed Chair Jerome Powell, during his semi-annual testimony before Congress, said that the US central bank would begin carefully hiking interest rates in March. Powell simultaneously promised that the Fed could take tougher action if inflation levels do not come down, though did little to impress the US dollar bulls amid a generally positive risk tone.

Despite rising geopolitical tensions, hopes of ceasefire talks between Russia and Ukraine remained supportive of a positive tone around the equity markets. That said, the worsening situation in Ukraine could act as a tailwind for the safe-haven greenback. This, in turn, could help limit the downside for the USD/CAD pair and warrants some caution for bearish traders.

In fact, reports suggest that Russia has intensified the bombardment of Ukrainian cities and Russian forces have captured the Black Sea port of Kherson. Hence, the market focus will remain on developments surrounding the Russia-Ukraine saga. The incoming headlines will drive the risk sentiment, which, along with oil price dynamics, should provide impetus to the USD/CAD pair.

From a technical perspective, sustained break and acceptance below the 100-day SMA might have already set the stage for an extension of the ongoing depreciating move for the USD/CAD pair. This, in turn, suggests that any meaningful recovery attempt could be seen as an opportunity to initiate fresh bearish positions and runs the risk of fizzling out rather quickly.

Market participants now look forward to the release of the usual Weekly Initial Jobless Claims data from the US. This, along with Fed Chair Jerome Powell's second day of testimony before the Senate Banking Committee, might influence the USD. Traders will further take cues from oil price dynamics for some short-term opportunities around the USD/CAD pair.

Technical levels to watch