USD/CAD consolidates in a range below mid-1.2600s

• USD/CAD lacked firm direction and remained confined in a narrow trading band on Monday.
• Hawkish Fed expectations, COVID-19 jitters underpinned the USD and extended some support.
• Rebounding crude oil prices benefitted the loonie and kept a lid on any further gains for the pair.

The USD/CAD pair extended its sideways consolidative move and remained confined in a range below mid-1.2600s heading into the European session.

A combination of diverging forces failed to assist the USD/CAD pair to capitalize on last week's gains to the highest level since early October and led to a subdued/range-bound price action on Monday. The US dollar stood tall near a 16-month peak amid expectations for an early policy tightening by the Fed and extended some support to the pair. That said, rebounding crude oil prices underpinned the commodity-linked loonie and capped the upside for the major.

The markets have been pricing in the possibility for an eventual Fed rate hike move by July 2022 amid persistent concerns about rising inflationary pressures. Moreover, the Fed funds futures indicate a high likelihood of another raise by November. The speculations were further fueled by Fed Governor Christopher Waller's comments, saying that the US central bank should speed up the pace of tapering to give more leeway to raise interest rates.

Hawkish Fed expectations were reinforced by elevated US Treasury bond yields, which, along with fresh COVID-19 jitters, underpinned the safe-haven greenback. The supporting factor, to a larger extent, was offset by a modest recovery in crude oil prices from a seven-week low touched earlier this Monday. Apart from this, a goodish pickup in the US equity futures failed to impress the USD bulls or provide any meaningful impetus to the USD/CAD pair.

Market participants now look forward to a relatively thin US economic docket, featuring the release of Existing Home Sales later during the early North American session. This, along with the US bond yields and the broader market risk sentiment, might influence the USD and provide some impetus to the USD/CAD pair. Traders will further take cues from oil price dynamics to grab some short-term opportunities around the major.

Technical levels to watch