USD/CAD remains stable, sideways around 1.2700 after Canadian data

• USD/CAD did attract some buying on the dips on Friday, although it lacked any follow-through.
• The drop in oil prices undermined the loonie and extended support to the loonie.
• Weak USD demand prevented the bulls from placing new bets and capped gains.

The pair USD/CAD reversed modest intraday losses and was seen trading in neutral territory around 1.2700 during the early American session.

The pair attracted some buying on the dips near the 1.2675-1.2670 area on Friday, although a combination of factors kept any significant gains limited. Hopes for a diplomatic solution to the Ukraine crisis coupled with expectations of a return of Iranian oil on the markets weighed on crude prices and undermined the commodity-linked loonie. This, in turn, was seen as a key factor that extended some support to the USD/CAD pair.

The intraday rally, however, lacked any bullish conviction amid subdued US dollar demand, weighed down by a positive risk tone and uncertainty over the pace of the Fed’s policy tightening cycle. FOMC Minutes January 25-26 failed to bolster expectations of a 50 bps rate hike in March. Furthermore, recent political developments could force the Fed to adopt a less aggressive policy stance to combat high inflation.

This coupled with a softer tone around US Treasury yields capped the USD rally and failed to impress bullish traders. The USD/CAD pair had a fairly muted reaction to mixed Canadian macro data, which showed that major retail sales contracted less than expected, by 1.8% in December. This was offset by a larger-than-expected 2.5% drop in core sales (excluding automobiles) during the reported month.

The focus shifts to US existing home sales data. This, along with broader market risk sentiment and US bond yields, will weigh on the greenback. Aside from this, traders will take cues from the oil price dynamics to take advantage of some short-term opportunities around the USD/CAD pair.

Technical levels to observe