USD/CAD refreshes weekly low, eyes 1.2700 ahead of Canadian CPI, US Retail Sales, FOMC

• A combination of factors exerted downward pressure on USD/CAD for the second straight day.
• An uptick in oil prices underpinned the loonie and prompted selling amid modest USD weakness.
• Traders await Canadian CPI and US Retail Sales for a fresh impetus ahead of the FOMC decision.

The USD/CAD pair added to its intraday losses and dropped to a fresh weekly low, around the 1.2720-1.2715 region during the first half of the European session.

The pair extended the previous day's sharp retracement slide from the multi-day peak, around the 1.2870 region and witnessed some follow-through selling for the second successive day on Wednesday. Crude oil prices regained positive traction and recovered a part of the overnight slump to the lowest level in almost three weeks. This, in turn, underpinned the commodity-linked loonie and exerted downward pressure on the USD/CAD pair amid modest US dollar weakness.

Russian forces have stepped up their aggression and intensified bombardment of Ukrainian cities. This, along with the lack of progress in ceasefire talks, fueled fears about the supply disruptions and acted as a tailwind for oil prices. That said, the resurgence of COVID-19 cases in China has raised concerns about reduced fuel demand. Moreover, hopes for a diplomatic solution to end the war in Ukraine should keep a lid on any meaningful gains for the black liquid.

On the other hand, the risk-on impulse - as depicted by the strong move in the equity markets - drove flows away from the safe-haven greenback, though elevated US Treasury bond yields should limit losses. The markets seem convinced that the Fed would kick start the policy tightening cycle and hike interest rates to combat high inflation. This, in turn, pushed the yield on the benchmark 10-year US government bond to the highest level since June 2019 and favours the USD bulls.

The fundamental backdrop favours bullish traders and supports prospects for the emergence of some dip-buying around the USD/CAD pair. Investors, however, might prefer to wait for the outcome of a two-day FOMC policy meeting, due later during the US session. In the meantime, traders will take cues from the Canadian CPI report and the US Retail Sales data for some impetus. Apart from this, oil price dynamics should allow traders to grab some short-term opportunities.

Technical levels to watch