USD/CAD clings to recovery gains, around mid-1.2700s ahead of US data/FOMC

• USD/CAD witnessed a short-covering bounce on Wednesday amid oversold conditions.
• A modest pullback in crude oil prices undermined the loonie and remained supportive.
• Sustained USD selling might cap the upside ahead of the US retail sales and the Fed.

The USD/CAD pair edged higher through the mid-European session and refreshed daily tops, around the 1.2755 region in the last hour.

Having shown some resilience below the 1.2700 mark, the pair managed to gain some positive traction on Wednesday and has now recovered the previous day’s fall to the lowest level since April 2018. The uptick lacked any obvious fundamental catalyst and could be categorized as a short-covering bounce from near-term oversold conditions.

Meanwhile, a modest pullback in crude oil prices, from the highest level since early March, undermined the commodity-linked currency – the loonie – and extended some support to the USD/CAD pair. That said, the prevalent bearish sentiment surrounding the US dollar might keep a lid on any strong recovery for the pair, at least for the time being.

As the US lawmakers made progress towards a new COVID-19 relief package, the key USD Index tumbled to fresh two-and-half-year lows amid the upbeat market mood. The global risk sentiment remained well supported by the recent optimism about the rollout of vaccines for the highly contagious coronavirus disease and hopes for a Brexit deal.

Adding to this, expectations the Fed will increase its bond-buying program exerted some additional downward pressure on the greenback through the major part of the trading action on Wednesday. Hence, investors will keep a close eye on the highly anticipated FOMC monetary policy update, scheduled to be announced later during the US session.

In the meantime, the release of the US monthly Retail Sales figures will be looked upon for some respite for the USD bulls and produce some short-term trading opportunities. However, the market reaction is likely to remain limited as investors might refrain from placing aggressive bets heading into the key event risk.

Technical levels to watch