USD/CAD falls to 1.2650 zone, two-week low amid further rise in oil prices/weaker USD

• A combination of factors dragged USD/CAD lower for the third day in a row on Thursday.
• A rebound in oil prices, a stronger Canadian CPI supported the Canadian dollar and put pressure.
• Ukraine diplomacy hopes, falling US bond yields weighed on safe haven USD.

The pair USD/CAD It continued to move lower during the middle of the European session and fell to a fresh two-week low around 1.2650 in the last hour.

The pair continued this week’s sharp retracement decline from the 1.2870 area and witnessed some follow-on selling for the third day in a row on Thursday. A nice rebound in crude oil prices underpinned the commodity-linked Canadian dollar and dragged the USD/CAD pair to its lowest level amid modest US dollar weakness.

Crude prices rose more than 4% after the International Energy Agency (EIA) said markets could lose three million barrels a day of Russian crude and refined products from April. This is due to a more positive than expected Canadian CPI report released on Wednesday which boosted demand for the Canadian dollar.

On the other hand, the latest optimism about the possibility of a diplomatic solution to end the war in Ukraine, coupled with falling US Treasury yields, weighed on the safe haven USD. This further contributed to the intraday drop in the USD/CAD pair from the 1.2700 level, confirming a short-term bearish breakout.

USD price action suggests that USD bulls seemed unimpressed by the outcome of a two-day FOMC monetary policy meeting on Wednesday. In fact, the Fed decided to raise interest rates for the first time since 2018 and indicated that it would adopt a more aggressive policy response to combat persistently high inflation.

Fed Chairman Jerome Powell stressed that the economy was strong enough to withstand tighter monetary policy. Powell added that the Fed could start cutting its nearly $9 trillion balance sheet as soon as the next meeting in May. This, however, was more or less in line with market expectations and failed to boost the USD.

The fundamental backdrop now seems tilted in favor of bearish traders and supports the prospects for a further short-term downside move towards the 1.2600 mark test. Said level coincides with the 200-day SMA and is followed by the monthly low, around the 1.2585 region, which should now act as the center point.

The broader risk sentiment and oil price dynamics should provide some lift to the USD/CAD pair.

Technical levels