USD/CAD dives to multi-day low, closer to 1.2700 mark ahead of US PCE/Canadian GDP

• A combination of factors prompted aggressive selling around USD/CAD on Friday.
• Rising oil prices underpinned the loonie and exerted pressure amid a weaker USD.
• Traders now eye Canadian GDP/US PCE inflation data for a meaningful impetus.

The USD/CAD pair added to its heavy intraday losses and dived to a three-day low, around the 1.2725 region during the early part of the European session.

Spot prices extended the previous day's sharp retracement slide from the 1.2875-1.2880 region, or the highest level since March 9 and witnessed aggressive selling on the last day of the week. This marked the third successive day of a negative move for the USD/CAD pair and was sponsored by a combination of factors.

The risk-on mood prompted some long-unwinding around the safe-haven US dollar, which, for now, seems to have snapped a six-day winning streak to the five-year peak touched the previous day. Apart from this, an uptick in crude oil prices underpinned the commodity-linked loonie and exerted pressure on the USD/CAD pair.

Concerns that falling output in sanctions-hit Russia - the world's second-biggest exporter - will tighten supply extended some support to crude oil. Adding to this, the increased likelihood that Germany will join other European Union member states in an embargo on Russian oil provided modest lift to the black liquid.

That said, fears that prolonged COVID-19 lockdowns could dampen fuel demand should keep a lid on any meaningful upside for crude oil prices. On the other hand, the prospects for a more aggressive policy tightening by the Fed and the deteriorating global economic outlook should help limit deeper losses for the safe-haven buck.

The fundamental backdrops favour the USD bulls and support prospects for the emergence of some dip-buying around the USD/CAD pair. Hence, any subsequent decline below the 1.2700 round-figure mark is more likely to find support and remain limited near the very important 200-day SMA, currently around the 1.2650-1.2640 area.

Market participants now look forward to Friday's economic docket, highlighting the release of the US Core PCE Price Index - the Fed's preferred inflation gauge - and the Canadian GDP report. This, along with the USD/oil price dynamics, will influence the USD/CAD pair and allow traders to grab some short-term opportunities.

Technical levels to watch