USD/CAD eases from multi-week highs, downside remains cushioned

• Some follow-through USD profit-taking capped the upside for USD/CAD on Thursday.
• Sliding US bond yields undermined the loonie and helped limit any meaningful slide.
• Hawkish Fed expectations should act as a tailwind for the USD and also lend support.

The USD/CAD pair edged lower through the early European session and was last seen flirting with daily lows, around the 1.2600 round-figure mark.

The pair witnessed a modest pullback from six-week tops touched earlier this Thursday and was weighed down by some follow-through US dollar profit-taking slide. Given the recent strong runup to a 16-month peak, retreating US Treasury bond yields turned out to be a key factor that prompted some USD long-unwinding trade.

That said, the prospects for an early policy tightening by the Fed should continue to act as a tailwind for the greenback. In fact, the markets have been pricing in the possibility of an eventual Fed rate hike move by July 2022 and the Fed funds futures indicate a high likelihood of another raise by November.

This, along with the prevalent cautious market mood, might assist the safe-haven USD to attract some dip-buying at lower levels. Apart from this, a further decline in crude oil prices could undermine the commodity-linked loonie and limit any meaningful slide for the USD/CAD pair, warranting caution for bearish traders.

Increasing pressure on US President Joe Biden to release supplies from the Strategic Petroleum Reserve (SPR) continued weighing on crude oil prices. Adding to this, a statement by China's state reserve bureau, saying that it was working on a release of crude oil reserves, dragged WTI crude oil to a six-week low.

The fundamental backdrop seems tilted firmly in favour of bullish traders and any subsequent fall might still be seen as a buying opportunity. Market participants now look forward to the US economic docket, featuring the releases of the Philly Fed Manufacturing Index and the usual Weekly Initial Jobless Claims.

This, along with the US bond yields and a scheduled speech by New York Fed President John Williams, will influence the USD and provide some impetus to the USD/CAD pair. Traders will further take cues from the broader market risk sentiment and oil price dynamics to grab some short-term opportunities around the major.

Technical levels to watch