USD/CAD trades with modest losses around 1.2530-25 region

• USD/CAD edged lower for the second successive day amid modest USD weakness.
• Hawkish Fed expectations could limit the USD losses and lend support to the pair.
• Weaker crude oil prices undermined the loonie and further favours bullish traders.

The USD/CAD pair remained depressed through the early European session and was last seen trading near two-day lows, around the 1.2530-25 region.

The pair extended the previous session's retracement slide from five-week tops – levels just above the 1.2600 mark – and edged lower for the second successive day on Monday. A combination of factors dragged the US dollar further away from the 16-month highs touched on Friday, which, in turn, exerted some pressure on the USD/CAD pair.

The University of Michigan survey released on Friday showed that the US consumer sentiment plunged to a 10-year low in November amid worries about a faster rise in inflationary pressures. This, along with a fresh leg down in the US Treasury bond yields, kept the USD bulls on the defensive through the first half of the trading action on Monday.

However, firming expectations that the Fed would be forced to adopt a more aggressive policy response to contain stubbornly high inflation should help the USD to attract some dip-buying at lower levels. In fact, the Fed funds futures indicate a 50% probability of an interest rate hike in July 2022 and a high likelihood of another by November.

Meanwhile, increasing pressure on US President Joe Biden to release supplies from the Strategic Petroleum Reserve (SPR) weighed on crude oil prices. This could undermine demand for the commodity-linked loonie and further contribute to limiting any meaningful corrective pullback for the USD/CAD pair, at least for the time being.

Market participants now look forward to the US economic docket, featuring the only release of the Empire State Manufacturing Index. This, along with the US bond yields and the broader market risk sentiment, will drive the USD demand. Traders will also take cues from oil price dynamics to grab some short-term opportunities around the USD/CAD pair.

Technical levels to watch