USD/CAD hangs near two-week low, around 1.2675 area amid uptick in oil prices/softer USD

• USD/CAD struggled to preserve its modest intraday gains to the 1.2700 neighbourhood.
• An uptick in crude oil prices underpinned the loonie and capped gains amid softer USD.
• The Fed’s hawkish outlook should limit the USD downtick and warrants caution for bears.

The USD/CAD pair surrendered its modest intraday gains and retreated closer to the two-week low, around the 1.2675 region during the early European session.

The pair gained some positive traction during the first half of the trading on Thursday, though the uptick lacked bullish conviction and ran out of steam near the 1.2700 round-figure mark. A combination of factors underpinned the Canadian dollar and acted as a headwind for the USD/CAD pair. On the other hand, the prevalent risk-on mood continued weighing on the safe-haven US dollar and attracted fresh selling around the major.

Crude oil prices edged higher after the International Energy Agency (IEA) said that markets could lose three million barrels per day of Russian crude and refined products from April. This, along with hotter-than-expected Canadian CPI, benefitted the commodity-linked loonie. In fact, Canada's annual inflation accelerated in February and reached its highest level since August 1991, adding pressure on the Bank of Canada to accelerate rate hikes.

That said, the resurgence of COVID-19 cases in China has raised concerns about reduced fuel demand. Apart from this, hopes for a diplomatic solution to end the war in Ukraine should keep a lid on any meaningful gains for the black liquid. Moreover, the Fed's hawkish outlook should limit the downside for the buck. This, in turn, should extend support to the USD/CAD pair, warranting some caution before placing aggressive bearish bets.

It is worth recalling that the Fed on Wednesday hiked interest rate for the first time since 2018 and also hinted to adopt a more aggressive policy response to combat high inflation. The so-called dot plot indicated that the Fed could raise interest rates at all the six remaining meetings in 2022. Hence, it will be prudent to wait for some follow-through selling before positioning for an extension of the two-day-old bearish trend.

Market participants now look forward to the US economic docket, featuring the release of the Philly Fed Manufacturing Index, the usual Weekly Initial Jobless Claims and Industrial Production data. Apart from this, fresh developments surrounding the Russia-Ukraine saga and the broader market risk sentiment would influence the USD. Traders will further take cues from oil price dynamics to grab some opportunities around the USD/CAD pair.

Technical levels to watch