USD/CAD struggles to gain any meaningful traction, holds steady above 1.2700 mark

• USD/CAD edged higher on Wednesday, though the uptick lacked bullish conviction.
• Retreating US bond yields acted as a headwind for the USD and capped the upside.
• Bullish oil prices underpinned the loonie and held traders from placing bullish bets.
• Investors also seemed reluctant ahead of the US macro data, FOMC meeting minutes.

The USD/CAD pair traded with a positive bias heading into the European session and was last seen hovering just a few pips below the daily high, around the 1.2715 region.

The pair managed to attract some buying on Wednesday and built on the overnight bounce from the 1.2665 area, though the uptick lacked follow-through buying or bullish conviction. Retreating US Treasury bond yields kept the US dollar bulls on the defensive and capped gains for the USD/CAD pair.

That said, speculations for a faster policy tightening by the Fed, along with a softer risk tone extended some support to the safe-haven greenback. In fact, the money markets have been pricing in the possibility for an eventual liftoff by May and two more interest rate hikes by the end of 2022.

This was reinforced by the fact that the US 2-year notes, which are highly sensitive to rate hike expectations along with 5-year notes, soared to levels not seen since February 2020 on Tuesday. Moreover, the yield on the benchmark 10-year bond shot to the highest level since November 24.

Meanwhile, an extended selloff in the US bond markets led to the overnight corrective pullback in the US tech stocks. The spillover effect was evident from a generally weaker sentiment around the Asian equity markets, which could further benefit the greenback's relative safe-haven status.

On the other hand, the commodity-linked loonie drew some support from bullish crude oil prices, though signs of declining global energy demand amid a massive spike in COVID-19 cases acted as a headwind. The market worries resurfaced after API reported that US fuel stockpiles rose last week.

The fundamental backdrop supports prospects for further gains, though traders preferred to wait for the release of FOMC minutes later during the US session. In the meantime, the US macro data – the ADP report, Building Permits and the final Services PMI – might provide some impetus to the USD/CAD pair.

Technical levels to watch