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  • A combination of factors prompted some fresh selling around USD/CAD on Tuesday.
  • Dovish Fed expectations weighed on the USD despite an uptick in the US bond yields.
  • A pickup in oil prices underpinned the loonie and further contribute to the selling bias.

The USD/CAD pair slipped below the key 1.2500 psychological mark during the early European session and has now moved closer to near one-month lows touched on Monday.

The pair struggled to capitalize on the previous day’s rebound of over 70 pips, instead met with some fresh supply on Tuesday and was pressured by a combination of factors. Speculations that the Fed will keep interest rates low for a longer period dragged the US dollar to six-week lows. Apart from this, a pickup in crude oil prices underpinned the commodity-linked loonie and exerted some downward pressure on the USD/CAD pair.

Investors seem convinced with the Fed’s view that any spike in inflation is likely to be transitory and have been scaling back expectations for an earlier than anticipated lift-off. This, along with the underlying bullish sentiment in the financial markets, continued weighing on the safe-haven greenback, which, so far, has struggled to find any support from the ongoing strong recovery move in the US Treasury bond yields.

Meanwhile, a weaker USD offered some support to dollar-denominated commodities, including oil. This was seen as another factor that contributed to the offered tone surrounding the USD/CAD pair. However, concerns about rising coronavirus cases in Asia might cap gains for the black gold and help limit the downside for the major amid absent relevant market-moving economic releases on Tuesday, either from the US or Canada.

Investors might also refrain from placing aggressive bets, rather prefer to wait on the sidelines ahead of the Bank of Canada (BoC) meeting on Wednesday. Hence, it will be prudent to wait for some strong follow-through selling below the 1.2470 area before positioning for any further depreciating move. That said, the emergence of some fresh selling suggests that the path of least resistance for the USD/CAD pair remains to the downside.

Technical levels to watch