USD/CAD corrects further from YTD peak, slides below 1.3100 amid modest USD weakness

• USD/CAD extended the overnight pullback from a 20-month high and edged lower on Friday.
• The overnight less hawkish remarks by Fed officials weighed on the USD and exerted pressure.
• Bearish sentiment around oil prices could undermine the loonie and help limit the downside.
• Investors now look forward to important US macro data for short-term trading opportunities.

The USD/CAD pair attracted some selling near the 1.3135 region on Friday and retreated further from its highest level since November 2020 touched the previous day. The modest intraday downtick extended through the first half of the European session and dragged spot prices back below the 1.3100 mark, though lacked follow-through.

The US dollar extended the overnight pullback from a two-decade high and was pressured by diminishing odds for a more aggressive policy tightening by the Fed. On Thursday, two of the Federal Reserve's most policymakers pushed back against market expectations for a 100 bps rate hike later this month. This led to a further decline in the US Treasury bond yields, which, in turn, acted as a headwind for the USD and exerted some downward pressure on the USD/CAD pair.

Apart from this, a slight recovery in the global risk sentiment - as depicted by signs of stability in the equity markets - further dented the greenback's safe-haven status. That said, the worsening global economic outlook could keep a lid on any optimism and continue lending support to the buck. Investors remain concerned that rapidly rising borrowing costs, the ongoing Russia-Ukraine war and fresh COVID-19 curbs in China would pose challenges to global growth.

The fears were further fueled by the dismal Chinese Q2 GDP print released earlier this Friday. This comes after Bank of America economists forecast a “mild recession” in the US this year. This, in turn, has raised concerns about the fuel demand outlook and capped the attempted recovery in oil prices from a five-month low touched on Thursday. The bearish sentiment surrounding the black liquid might undermine the commodity-linked loonie and further lend support to the USD/CAD pair.

Traders might also be reluctant to place aggressive bets and prefer to wait on the sidelines ahead of key US macro data. Friday's US economic docket features the monthly Retail Sales, the Empire State Manufacturing Index, Industrial Production and Michigan Consumer Sentiment Index. This, along with the US bond yields and the broader market risk sentiment, will influence the USD. Apart from this, oil price dynamics should provide a fresh impetus to the USD/CAD pair.

Technical levels to watch