USD/CAD remains depressed below mid-1.2100s

The USD/CAD pair remained on the defensive through the early European session and was last seen hovering near two-day lows, around the 1.2135 region.

The pair edged lower for the second straight session on Tuesday and retreated further from one-month tops, around the 1.2175-80 region touched last week. The recent strong bullish run in crude oil prices continued underpinning the commodity-linked loonie. This, along with a subdued US dollar demand, exerted some pressure on the USD/CAD pair.

The continuous improvement of the coronavirus situation in the United States and much of Europe has been fueling optimism for a strong recovery in the fuel demand. This, in turn, pushed the commodity to the highest level since October 2018. That said, the prospect of extra supply coming to the market soon from Iran capped any further gains.

On the other hand, the USD was pressured by a fresh leg down in the US Treasury bond yields. However, expectations of a slightly less dovish Fed – amid worries about rising inflationary pressure – should help put a tentative floor under the greenback. This should limit any meaningful slide for the USD/CAD pair, at least for the time being.

Investors might also be reluctant to place any aggressive bets ahead of the highly-anticipated FOMC monetary policy decision on Wednesday. This further makes it prudent to wait for some follow-through selling before confirming that the recent bounce from the vicinity of the key 1.2000 psychological mark, or multi-year lows has already run out of steam.

Traders now look forward to the US economic docket – featuring the release of Retail Sales, Producer Price Index (PPI), Empire State Manufacturing Index and Industrial Production data. This, along with the US bond yields, might influence the USD. Apart from this, oil price dynamics should produce some trading opportunities around the USD/CAD pair.

Technical levels to watch