USD/CAD inches back closer to 1.2700 mark amid retreating oil prices, stronger USD

• USD/CAD gained positive traction on Thursday and built on the overnight bounce a multi-week low.
• Retreating oil prices undermined the loonie and provided a modest lift amid a modest USD strength.
• Hawkish Fed expectations, rising US bond yields, cautious market mood all benefitted the greenback.

The USD/CAD pair continued scaling higher through the first half of the European session and climbed to a two-day high, around the 1.2685 region in the last hour.

A combination of factors assisted the USD/CAD pair to build on the previous day's post-BoC recovery move from the 1.2600 neighbourhood and gain some positive traction on Thursday. The Bank of Canada held interest rate at 0.25% and stuck to its guidance that a first hike could come in the middle quarters of 2022. The BoC, however, warned that the Omicron coronavirus variant has created renewed uncertainty, which seemed to be the only factor that weighed on the Canadian dollar.

Meanwhile, crude oil prices struggled to find acceptance above the $73.00/barrel mark and witnessed a modest pullback from a two-week high touched earlier this Thursday. This further undermined the commodity-linked loonie and provided a goodish lift to the USD/CAD pair amid a modest pickup in the US dollar demand. A further rise in the US Treasury bond yields, bolstered by hawkish Fed expectations, along with the cautious market mood extended some support to the safe-haven greenback.

Investors seem convinced that the Fed would tighten its monetary policy sooner rather than later to contain stubbornly high inflation and have been pricing in the possibility for liftoff in May 2022. This was seen as a key factor that pushed the yield on the benchmark 10-year US government bond back above the 1.50% threshold. Adding to this, escalating geopolitical tensions overshadowed the recent optimism in the markets and acted as a tailwind for safe-haven currencies, including the USD.

Market participants now look forward to the US economic docket, featuring the release of the usual Weekly Initial Jobless Claims. Traders will further take cues from the US bond yields and the broader market risk sentiment, which will drive the USD demand. Apart from this, oil price dynamics should provide some impetus to the USD/CAD pair. The key focus, however, will remain on Friday's release of the US consumer inflation figures, which will help determine the next leg of a directional move.

Technical levels to watch