USD/CAD struggles near 1.2600, bulls trying to defend 200-DMA amid modest USD strength

• USD/CAD continued losing ground for the fourth straight day and dropped to over a two-week low.
• An uptick in crude oil prices underpinned the loonie and exerted downward pressure on the pair.
• Sustained weakness below the 1.2585 region will set the stage for a further depreciating move.

The USD/CAD pair maintained its offered tone through the early European session and was last seen trading near the 1.2600 mark, or over a two-week low.

The pair extended this week's sharp retracement slide from the 1.2870 region and witnessed some selling during the early part of the trading on Friday. The lack of progress in the Russia-Ukraine peace negotiations pushed crude oil prices to a multi-day high. This, in turn, underpinned the commodity-linked loonie and exerted some downward pressure on the USD/CAD pair.

That said, the resurgence of COVID-19 cases in China has raised concerns about reduced fuel demand. This, along with a softer risk tone, keep a lid on any meaningful gains for the black liquid. Apart from this, the emergence of some US dollar buying assisted the USD/CAD pair to find some support and defend the very important 200-day SMA support, at least for the time being.

The Fed's hawkish outlook, indicating that it could hike rates at all the six remaining meetings in 2022, acted as a tailwind for the USD. Moreover, Fed Chair Jerome Powell said that the US central bank could start shrinking its near $9 trillion balance sheet as soon as the next meeting in May. This supports prospects for the emergence of some dip-buying around the USD/CAD pair.

That said, acceptance below a technically significant moving average, leading to a subsequent break through the monthly low, around the 1.2585 region, will be seen as a fresh trigger for bearish traders. The USD/CAD pair might then accelerate the slide towards mid-1.2500s en-route intermediate support near the 1.2525 zone before dropping to the key 1.2500 psychological mark.

The market focus will remain glued to fresh developments surrounding the Russia-Ukraine saga. This, along with a meeting between US President Joe Biden and Chinese leader Xi Jinping, would drive the broader market risk sentiment and the USD demand. Traders will further take cues from oil price dynamics for some short-term opportunities around the USD/CAD pair.

Technical levels to watch