USD/CAD remains on the defensive below 1.2900 post-US data, downside seems cushioned

• USD/CAD witnessed an intraday turnaround from over a one-week high touched on Thursday.
• Rebounding oil prices underpin the loonie and exert pressure amid a modest USD pullback.
• The upbeat US macro data, hawkish Fed expectations should limit the USD and lend support.

The USD/CAD pair retreats from a one-and-half-week high touched earlier this Thursday and drops to a fresh daily low during the early North American session. The pair is currently trading just below the 1.2900 mark and is pressured by a combination of factors.

Crude oil prices gain some positive traction and move away from over a six-month low set on Tuesday, which underpins the commodity-linked loonie and acts as a headwind for the USD/CAD pair. This, along with a modest US dollar pullback from a fresh monthly peak, attracts some selling at higher levels and further contributes to the intraday slide.

The overnight bullish Energy Information Administration (EIA) report, showing a steeper-than-expected drawdown in US crude stocks helps offset concerns that a global economic downturn would hit fuel demand. Furthermore, expectations that the European Union embargoes on Russian oil imports could tighten supply offer support to the black liquid.

The USD, on the other hand, fails to capitalize on its modest intraday uptick amid retreating US Treasury bond yields. Apart from this, a goodish intraday recovery in the equity markets prompts some profit-taking around the safe-haven greenback. That said, upbeat US macro releases help limit the downside for the buck and the USD/CAD pair.

In fact, the Philly Fed Manufacturing Index came in at 6.2 for August against consensus estimates for an improvement to -5 from the -12.3 reported in the previous month. Separately, the US Initial Jobless Claims unexpectedly fell to 250K during the week ended August 12 from the previous week's downwardly revised reading of 252K (262K reported previously).

This comes a day after the FOMC minutes indicated that policymakers would not consider pulling back on interest rate hikes until inflation came down substantially and reaffirmed hawkish Fed expectations. Market participants seem convinced that the Fed would stick to its policy tightening path, which supports prospects for the emergence of some USD dip-buying.

The fundamental backdrop suggests that the path of least resistance for the USD/CAD pair is to the upside, suggesting that any subsequent slide might still be seen as a buying opportunity. Hence, it would be prudent to wait for strong follow-through selling before confirming a near-term top and positioning for any meaningful decline.

Technical levels to watch