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  • A softer tone around oil prices undermined the loonie and extended some support to USD/CAD.
  • Dovish Fed expectations continued weighing on the USD and kept a lid on the attempted bounce.

The USD/CAD pair extended its sideways consolidative price action through the mid-European session and remained confined in a narrow trading band above the 1.2100 mark. The pair was last seen hovering around the 1.2120-25 region, up over 0.20% for the day.

Having shown some resilience below the 1.2100 mark on Friday, the pair managed to gain some positive traction on the first day of a new week and was supported by a combination of factors. The continuous surge in COVID-19 cases across Asia and the imposition of fresh restrictions fanned worries about fuel demand recovery.

Apart from this, underwhelming Chinese Industrial Production data, along with a generally softer risk tone acted as a headwind for crude oil prices. This, in turn, undermined demand for the commodity-linked loonie and extended some support to the USD/CAD pair. That said, a combination of factors capped the upside.

The divergence in monetary policies adopted by the Bank of Canada and the Federal Reserve held bullish traders from placing any aggressive bets around the USD/CAD pair. At the April policy meeting, the BoC reduced its weekly asset purchases and brought forward the guidance for the first interest rate hike to the second half of 2022.

On the other hand, investors remain convinced that the Fed will keep interest rates low for a longer period. The expectations were reinforced by Friday’s disappointing release of the US monthly Retail Sales report, which, along with the ongoing decline in the US Treasury bond yields, continued weighing on the US dollar.

Even from a technical perspective, the USD/CAD pair’s inability to register any meaningful recovery and the emergence of some fresh selling at higher levels favours bearish traders. This, in turn, suggests that the path of least resistance is down and any attempted recovery might still be seen as a selling opportunity.

There isn’t any major market-moving economic data due for release on Monday, either from the US or Canada. Hence, the US bond yields and the broader market risk sentiment will play a key role in influencing the USD. Traders might further take cues from crude oil price dynamics to grab some short-term momentum play.

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