USD/CAD steadily climbs back to mid-1.2500s amid modest USD strength

• USD/CAD regained positive traction and recovered a major part of Friday’s losses.
• A softer risk tone, Powell’s upbeat comments extended some support to the USD.
• An uptick in oil prices underpinned the loonie and capped the upside for the pair.

The USD/CAD pair edged higher through the first half of the Asian session and was last seen hovering near the top end of its intraday trading range, around mid-1.2500s.

The pair managed to regain some positive traction on the first day of a new trading week and recovered a major part of Friday's losses, led by blowout Canadian monthly jobs data. According to Statistics Canada, the economy added 303.1K jobs and the unemployment rate tumbled to 7.5% in March. The data raised expectations that the BoC could slow the pace of its bond purchases as soon as April and acted as a positive trigger for the Canadian dollar.

As investors digested the upbeat macro release, a generally softer tone around the equity markets benefitted the safe-haven US dollar and extended some support to the USD/CAD pair. The USD bulls further took cues from Fed Chair Jerome Powell's upbeat comments, saying that the US economy really seems to be at an inflexion point. This reinforced the market expectations for a relatively faster US economic recovery from the pandemic.

Powell further added that the Fed does want inflation moderately' above 2% for some time but does not want it to go materially above 2% and return to the bad, old inflation days. It is worth mentioning here that the optimistic outlook for the US economy – thanks to the impressive pace of coronavirus vaccinations and the US President Joe Binde's over $2 trillion infrastructure spending plan – has been fueling speculations about an uptick in US inflation.

This, in turn, raised doubts that the Fed will retain ultra-low interest rates for a longer period. Hence, the focus now shifts to this week's release of the US consumer inflation figures on Tuesday.

The supporting factor, to some extent, was offset by a pickup in crude oil prices, which underpinned the commodity-linked loonie and kept a lid on any further gains for the USD/CAD pair. Investors also seemed reluctant to place any aggressive bets, rather preferred to wait on the sidelines ahead of Monday's release of the BoC's Business Outlook Survey report.

Hence, it will be prudent to wait for some strong follow-through buying before confirming that the pair has bottomed out and positioning for any further appreciating move. From a technical perspective, the USD/CAD pair, so far, has managed to defend and hold comfortably above the key 1.2500 psychological mark. This should act as a key pivotal point for short-term traders and help determine the next leg of a directional move for the major.

Technical levels to watch