• A combination of factors weighed on USD/CAD for the third consecutive session on Thursday.
  • Bullish oil prices underpinned the loonie and exerted pressure amid a subdued USD demand.
  • Rising bets for an early Fed rate hike acted as a tailwind for the USD and should lend support.

The USD/CAD pair dropped to over three-month lows during the early European session, with bears now eyeing a break below the 1.2400 round-figure mark.

Crude oil prices held steady near multi-year tops and continued underpinning the commodity-linked loonie. This, in turn, was seen as a key factor that dragged the USD/CAD pair lower for the third consecutive session on Thursday amid a subdued US dollar price action. The longer-dated US Treasury bond yields declined further following a slightly higher than estimated US CPI print, suggesting that the market is still not convinced about a sustained period of inflation. This was seen as a key factor that kept the USD bulls on the defensive.

That said, prospects for an early policy tightening by the Fed helped limit any deeper USD losses, though did little to impress bulls or lend any support to the USD/CAD pair. The minutes of the FOMC monetary policy meeting held on September 21-22 revealed that the US central bank remains on track to begin tapering its bond purchases in 2021. Moreover, a growing number of policymakers were worried about the continuous rise in inflationary pressures, forcing investors to bring forward the likely timing of a potential interest rate hike.

The markets now seem to have started betting on the possibility of the so-called lift-off in September 2022 as against December 2022 already priced in. This was reinforced by an uptick in the US bond yields, which should help revive the USD demand and act as a tailwind for the USD/CAD pair. Even from a technical perspective, the pair has managed to defend support marked by the lower end of a four-week-old descending trend channel. This makes it prudent to wait for a sustained weakness below the mentioned support before placing fresh bearish bets.

Market participants now look forward to the US economic docket, featuring the release of the Producer Price Index (PPI) and the usual Weekly Initial Jobless Claims. This, along with the US bond yields and scheduled speeches by influential FOMC members, will drive the USD demand. Apart from this, traders might further take cues from the official US crude inventories data, which will influence oil price dynamics and provide a fresh impetus to the USD/CAD pair.

Technical levels to watch