USD/CAD holds above mid-1.2600s, downside seems protected ahead of key US data

• USD/CAD struggled to capitalize on its intraday positive move and failed near the 1.2700 mark.
• Positive oil prices underpinned the loonie and capped the upside amid a subdued USD demand.
• Hawkish Fed expectations continued acting as a tailwind for the USD and should help limit losses.

The USD/CAD pair surrendered modest intraday gains and has now retreated to the lower end of its daily trading range, around the 1.2665 region.

The pair gained some positive traction during the early part of the trading action on Wednesday, albeit struggled to capitalize on the move and the uptick faltered ahead of the 1.2700 mark. Crude oil prices added to the previous day's strong gains and climbed to a fresh weekly high. This, in turn, underpinned the commodity-linked loonie and acted as a headwind for the USD/CAD pair amid a subdued US dollar price action.

The USD extended its consolidative price move near a 16-month peak for the second successive day amid retreating US Treasury bond yields. That said, the prospects for an early policy tightening by the Fed, reinforced by Jerome Powell's renomination as the Fed chair, continued underpinning the buck. This should help limit any deeper losses for the USD/CAD pair, warranting some caution before placing fresh bearish bets.

Investors seem convinced that the Fed would be forced to adopt a more aggressive policy response to contain stubbornly high inflation. In fact, the markets have been pricing in the possibility for a rate hike move by July 2022. Moreover, the Fed fund futures indicate a high likelihood for another raise in November. This makes it prudent to wait for some follow-through selling before confirming a near-term top for the USD/CAD pair.

Market participants now look forward to the US economic docket, highlighting the releases of the Prelim (second estimate) US Q3 GDP, Durable Goods Orders and Core PCE Price Index. This, along with the FOMC meeting minutes, will influence the USD and provide a fresh impetus to the USD/CAD pair. Apart from this, traders will take cues from oil price dynamics to grab some short-term opportunities around the major.

Technical levels to watch