USD/CAD slips below 1.2700, fresh daily low amid modest USD pullback/rising oil prices

• USD/CAD witnessed fresh selling on Friday and was pressured by a combination of factors.
• An intraday uptick in crude oil prices underpinned the loonie and exerted some pressure.
• Retreating US bond yields weighed on the USD and also contributed to the intraday selling.

The USD/CAD pair extended its steady intraday descent through the mid-European session and slipped below the 1.2700 mark in the last hour.

A combination of factors failed to assist the USD/CAD pair to capitalize on its early uptick and prompted fresh selling in the vicinity of the weekly high, around the 1.2750 region. A fresh leg up in crude oil prices underpinned the commodity-linked loonie. Apart from this, modest US dollar pullback from over one-week high touched on Friday exerted some pressure on the major.

Oil prices continued drawing support from hopes that global supply would remain tight amid the post-pandemic recovery in fuel demand. In fact, the IEA raised its 2022 demand forecast by 800,000 bpd. This, along with the conflict between Russia and the West over Ukraine, helped offset concerns of a possible rise in supplies from Iran and acted as a tailwind for black gold.

On the other hand, the US Treasury bond yields retreated from the overnight post-US CPI swing high and attracted some sellers around the USD. This was seen as another factor that contributed to the USD/CAD pair's intraday pullback of over 50 pips. That said, the prospects for a faster policy tightening by the Fed should help limit any downside for the greenback and the major.

Investors now seem convinced that the Fed would adopt a more aggressive policy stance to combat high inflation and have been pricing in the possibility of a 50 bps rate hike in March. The market bets were further boosted by more hawkish comments from St. Louis Fed President James Bullard, calling for 100 basis points over the next three FOMC policy meetings.

Hence, it will be prudent to wait for a strong follow-through selling before positioning for deeper losses. Traders now look forward to the release of the Prelim University of Michigan US Consumer Sentiment Index. This, along with the US bond yields, will influence the USD. Apart from this, oil price dynamics might provide some impetus to the USD/CAD pair.

Technical levels to watch