USD/CAD clings to gains around 1.2530-35 region, US Retail Sales in focus

• USD/CAD reversed an early dip to sub-1.2500 levels amid renewed USD buying interest.
• Hawkish Fed expectations, the cautious market mood underpinned the safe-haven USD.
• Bulls largely shrugged off an uptick in crude oil prices, which tend to benefit the loonie.
• The market focus remains on Tuesday’s release of the US monthly Retail Sales figures.

The USD/CAD pair edged higher through the mid-European session and touched an intraday high level of 1.2535 in the last hour.

The pair showed some resilience below the key 1.2500 psychological mark and attracted some dip-buying on Tuesday, snapping two successive days of the losing streak. The uptick was exclusively sponsored by the prevalent strong bullish sentiment surrounding the US dollar, which remained well supported by the prospects for an early policy tightening by the Fed.

The markets have been pricing in the possibility for an eventual rate hike move by July 2022 and the Fed funds futures indicate a high likelihood of another raise by November amid rising inflationary pressures. It is worth recalling that data released last Wednesday showed that the US consumer prices in October rose at the fastest pace since 1990.

Meanwhile, worries about a faster-than-expected rise in inflation continued weighing on investors' sentiment. This was evident from the cautious mood around the equity markets, which further underpinned the greenback's relative safe-haven status. That said, retreating US Treasury bond yields might hold back the USD bulls from placing fresh bets.

Apart from this, an uptick in crude oil prices could lend some support to the commodity-linked loonie and cap any further gains for the USD/CAD pair. Investors also seemed reluctant and preferred to wait on the sidelines ahead of Tuesday's release of the US monthly jobs report, warranting some caution before positioning for any further gains.

The data, along with the US bond yields and speeches by a slew of FOMC members, will influence the USD and provide a fresh impetus during the early North American session. Traders will further take cues from oil price dynamics to grab some short-term opportunities around the USD/CAD pair.

Technical levels to watch