USD/CAD struggles near 1.2800 as broad-based USD weakness offset sliding oil prices

• USD/CAD dropped back closer to a two-week low amid the emergence of fresh USD selling.
• Retreating US bond yields weighed on the buck, though Fed rate hike bets should limit losses.
• Weaker crude oil prices could undermine the loonie and help limit deeper losses for the pair.

The USD/CAD pair came under renewed selling pressure on Thursday and reversed a major part of the overnight bounce from a two-week low. The pair maintained its offered tone through the mid-European session and was last seen trading near the lower end of its daily range, just above the 1.2800 mark.

The Canadian dollar drew support from strong domestic consumer inflation figures released on Wednesday, which showed no signs of easing and rose 6.8% YoY in April, the fastest pace since 1991. The data suggested the Bank of Canada is unlikely to slow down the pace of rate hikes amid strong labour market, which tends to put upward pressure on prices.

On the other hand, retreating US Treasury bond yields attracted fresh selling around the US dollar, which was seen as another factor exerting downward pressure on the USD/CAD pair. The combination of factors helped offset modest weakness around crude oil prices, which did little to undermine the commodity-linked loonie or lend support to the pair.

That said, the prospects for a more aggressive policy tightening by the Fed should act as a tailwind for the US bond yields. Apart from this, the prevalent risk-off environment supports prospects for the emergence of some USD dip-buying and should help limit deeper losses for the USD/CAD pair. This, in turn, warrants some caution for aggressive bearish traders.

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 Existing Home Sales data. This, along with the US bond yields, will influence the USD. Traders will further take cues from oil price dynamics to grab short-term opportunities around the USD/CAD pair.

Technical levels to watch