USD/CAD drops to 1.2600 neighbourhood, three-day lows amid notable USD supply

The USD/CAD pair extended its steady intraday descent and dropped to the 1.2600 neighbourhood, or three-day lows during the first part of the European session.

Following the previous day's two-way price moves, the pair came under some renewed selling pressure on Tuesday and was weighed down by a combination of factors. The US dollar witnessed some profit-taking from three-and-half-month tops amid a modest pullback in the US Treasury bond yields. Apart from this, a positive tone around crude oil prices underpinned the commodity-linked currency and exerted some additional pressure on the USD/CAD pair.

Investors also seemed inclined to lighten their USD bulls bets in anticipation of some action from the Fed to curb the rise in long-term borrowing cost. Apart from this, the risk-on mood further dented the greenback's relative safe-haven status. That said, the upbeat US economic outlook, buoyed by the passage of the much-awaited $1.9 trillion pandemic relief package, should help limit any meaningful USD losses, at least for the time being.

On the other hand, the Canadian dollar benefitted from a fresh leg up in crude oil prices. Prospects for a tighter supply due to extended OPEC+ output curbs and hopes for a strong global fuel demand assisted the commodity to hold steady near multi-month tops set on Monday. That said, the lack of any strong follow-through selling around the USD/CAD pair warrants some caution before positioning for any further depreciating move.

In the absence of any major market-moving economic releases, either from the US or Canada, the US bond yields and the broader market risk sentiment will influence the USD. This, along with oil price dynamics, could produce some meaningful trading opportunities around the USD/CAD pair.

Technical levels to watch