USD/CAD retreats from two-month high amid weaker USD, Canadian GDP in focus

• A fresh leg down in oil prices undermined the loonie and pushed USD/CAD to a two-month high.
• A steep decline in the US bond yields weighed on the USD and kept a lid on any meaningful gains.
• Investors now look forward to Canadian GDP, US data and Powell’s testimony for some impetus.

The USD/CAD pair trimmed a part of its intraday gains to over a two-month high and was last seen trading around the 1.2770 region, up over 0.15% for the day.

Following the previous day's good two-way price moves, the USD/CAD pair regained positive traction on Tuesday and shot to the highest level since September 22 amid a fresh leg down in crude oil prices. the detection of a new and possibly vaccine-resistant coronavirus variant fueled worries about the oil demand outlook and dragged spot prices to the lowest level since August 25. This, in turn, undermined the commodity-linked loonie and turned out to be a key factor that provided a goodish lift to the major.

Bulls, however, struggled to find acceptance above the 1.2800 mark amid the heavily offered tone surrounding the US dollar. The developments surrounding the coronavirus saga forced pushed back market expectations about the likely timing when the Fed would begin tightening its monetary policy. In fact, the money markets now indicate a 25 bps rate hike in September 2022 as against July 2022 already priced in. This, along with the risk-off impulse, triggered a steep decline in the US bond yields and weighed on the greenback.

Meanwhile, the USD/CAD pair has now retreated over 40 pips from the daily swing high, though any further downfall seems limited ahead of the Canadian GDP report. Traders on Tuesday will further take cues from the US economic docket, featuring the release of Chicago PMI and the Conference Board's Consumer Confidence Inxed. The key focus, however, will be on Fed Chair Jerome Powell's testimony before the Senate Banking Committee.

Powell's remarks will influence market expectations about the Fed's near-term policy outlook and drive the USD demand. Apart from this, oil price dynamics will further be looked upon for some impetus and short-term trading opportunities around the USD/CAD pair.

Technical levels to watch