USD/CAD slides to 1.2600 neighbourhood, closer to weekly lows touched on Tuesday

• USD/CAD pair witnessed some selling for the third consecutive session on Wednesday.
• Retreating US bond yields and the risk-on mood kept the USD bulls on the defensive.
• An uptick in crude oil prices underpinned the loonie and contributed to the selling bias.

The USD/CAD pair edged lower during the early North American session on Wednesday and dropped to the 1.2600 neighbourhood, or weekly lows set on Tuesday.

Following the previous day's good two-way price swings, the pair met with some fresh supply and traded with a negative bias for the third consecutive session. A combination of factors continued benefitting the Canadian dollar, which, along with a subdued US dollar price action, exerted some pressure on the USD/CAD pair through the first half of the trading action.

Statistics Canada reported on Tuesday that the domestic economy grew at a 9.6% annualized pace during the fourth quarter of 2020. Adding to this, a flash estimate showed that the GDP rose 0.5% in January, defying expectations for a contraction at the start of the year. Apart from this, bullish crude oil prices continued underpinning the commodity-linked currency – loonie.

On the other hand, a fresh leg up in the equity markets and a softer tone surrounding the US Treasury bond yields kept the USD bulls on the defensive. This was seen as another factor that prompted some selling around the USD/CAD pair. That said, the upbeat US economic outlook might extend some support to the USD and help limit any further downside for the major.

Investors remain optimistic about a relatively strong US economic recovery from the pandemic amid the progress in COVID-19 vaccinations and a massive US fiscal stimulus plan. Moreover, the reflation trade seemed to have forced investors to price in a possible uptick in inflation and raised doubts that the Fed would retain ultra-low interest rates for a longer period.

It will now be interesting to see if the USD/CAD pair is able to attract any buying at lower levels or breaks below the 1.2600 round-figure mark and resume its prior/well-established bearish trend. Market participants now look forward to the release of the US ADP report on private-sector employment and the US ISM Services PMI for some meaningful trading opportunities.

Technical levels to watch