USD/CAD drops to mid-1.2600s, two-week low amid a fresh leg up in oil prices/softer USD

• A combination of factors dragged USD/CAD lower for the third successive day on Thursday.
• A pickup in oil prices, stronger Canadian CPI underpinned the loonie and exerted pressure.
• Hopes for diplomacy in Ukraine, retreating US bond yields weighed on the safe-haven USD.

The USD/CAD pair continued drifting lower through the mid-European session and dropped to a fresh two-week low, around mid-1.2600s in the last hour.

The pair prolonged this week's sharp retracement slide from the 1.2870 area and witnessed some follow-through selling for the third successive day on Thursday. A goodish pickup in crude oil prices underpinned the commodity-linked loonie and dragged the USD/CAD pair lowest amid modest US dollar weakness.

Crude oil prices rallied over 4% after the International Energy Agency (IEA) said that markets could lose three million barrels per day of Russian crude and refined products from April. This comes on the back of hotter-than-expected Canadian CPI print released on Wednesday and boosted demand for the Canadian dollar.

On the other hand, the latest optimism over the possibility of a diplomatic solution to end the war in Ukraine, along with retreating US Treasury bond yields weighed on the safe-haven USD. This further contributed to the USD/CAD pair's intraday slide from the 1.2700 mark, confirming a near-term bearish breakdown.

The USD price action suggests that the USD bulls seemed rather unimpressed by the outcome of a two-day FOMC monetary policy meeting on Wednesday. In fact, the Fed decided to hike interest rates for the first time since 2018 and indicated that it would adopt a more aggressive policy response to combat stubbornly high inflation.

Fed Chair Jerome Powell emphasised that the economy was strong enough to withstand tighter monetary policy. Powell added that the Fed could start shrinking its near $9 trillion balance sheet as soon as the next meeting in May. This, however, was more or less in line with market expectations and failed to lift the USD.

The fundamental backdrop now seems tilted in favour of bearish traders and supports prospects for a further near-term depreciating move, towards testing the 1.2600 mark. The said handle coincides with the 200-day SMA and is followed by the monthly low, around the 1.2585 region, which should now act as the pivotal point.

Market participants now look forward to the US economic docket, featuring the release of the Philly Fed Manufacturing Index, the usual Weekly Initial Jobless Claims and Industrial Production data. This, along with the broader risk sentiment and oil price dynamics, should provide some impetus to the USD/CAD pair.

Technical levels to watch