USD/CAD slides to 1.2725 area, reverses overnight gains ahead of OPEC meeting

• USD/CAD witnessed some selling on Wednesday and retreated further from an over three-month high.
• Rebounding oil prices underpinned the loonie and exerted pressure amid a subdued USD demand.
• Investors now eye the OPEC meeting, US macro releases and Powell’s testimony for a fresh impetus.

The USD/CAD pair edged lower through the early European session and dropped to the lower end of its weekly trading range, around the 1.2725 region in the last hour.

The pair extended the previous day's late pullback from the 1.2835 area, or the highest level since September 21 and witnessed some selling during the first half of the trading action on Wednesday. The intraday decline was sponsored by a combination of factors – a goodish pickup in crude oil prices and a subdued US dollar demand.

In fact, WTI crude oil rallied nearly 3% and recovered further from over three-month low touched on Tuesday. Rising bets that major oil producers would pause plans to add crude supply in January in the wake of fresh COVID-19 jitters extended some support to the black gold. This, in turn, undermined the commodity-linked loonie.

On the other hand, the US dollar, so far, has struggled to attract buyers despite rebounding US Treasury bond yields, bolstered by Fed Chair Jerome Powell's hawkish comments. Testifying before the Senate Banking Committee, Powell said that it is appropriate to consider wrapping up the tapering of asset purchases, perhaps a few months sooner.

Powell further added that it's time to retire the word transitory as the risk of persistently higher inflation has increased and expected high inflation through next year. Reacting to Powell's remarks, the money markets started pricing in the possibility of at least a 50 bps rate hike by the end of 2022, which acted as a tailwind for the US bond yields.

The fundamental backdrop favours the USD bulls and warrants some caution for aggressive bearish traders. Market participants now look forward to headlines coming out of the OPEC meeting, which will influence oil price dynamics and provide some impetus to the USD/CAD pair. Traders will further take cues from the US macro releases.

The US economic docket features the release of the ADP report on private-sector employment and ISM Manufacturing PMI later during the early North American session. Apart from this, Fed Chair Jerome Powell and US Treasury Secretary Janet Yellen's joint testimony before the House Financial Services Committee will drive the USD demand.

Technical levels to watch