USD/CAD retreats further from near two-month peak, downside seems limited

• USD/CAD drifts lower for the second straight day and is pressured by a combination of factors.
• An uptick in Oil prices underpins the Loonie and weighs on the pair amid a modest USD downtick.
• Hawkish Fed expectations should act as a tailwind for the USD and help limit any further losses.

The USD/CAD pair extends the previous day's retracement slide from the vicinity of mid-1.3500s, or its highest level in almost two months and remains under some selling pressure for the second straight day on Wednesday. The downtick is sponsored by a combination of factors and drags spot prices to the 1.3475 region, or the 200-day Simple Moving Average (SMA) pivotal point during the Asian session.

The US Energy Information Administration (EIA), in the February Short-Term Energy Outlook report released on Tuesday, cut its forecast for domestic Oil output growth for 2024 and eased worries about excess supply. This, along with the recent attacks on shipping by Iranian-backed Houthi rebels in the crucial Red Sea, which sees nearly 12% of the global Oil trade, lends support to the black liquid, which, in turn, is seen underpinning the commodity-linked Loonie. The US Dollar (USD), on the other hand, remains on the defensive below its highest level since November 14 and turns out to be another factor exerting some downward pressure on the USD/CAD pair.

The overnight pullback in the US Treasury bond yields prompted some USD profit-taking, especially after the post-NFP move up, though hawkish Federal Reserve (Fed) expectations should help limit deeper losses. The incoming US macro data suggested that the economy is in good shape, giving the Fed more headroom to keep interest rates higher for longer. Adding to this, the recent hawkish comments by a slew of influential FOMC members further forced investors to continue scaling back their expectations for an aggressive policy easing in 2024. This could act as a tailwind for the US bond yields, which favours the USD bulls and should lend support to the USD/CAD pair.

Moreover, technical indicators on the daily chart – though have been losing traction – are still holding in the positive territory and support prospects for the emergence of some dip-buying at lower levels. Moving ahead, traders now look to the release of Trade Balance data from the US and Canada for some impetus ahead of the EIA data on US Oil inventory, due later during the North American session. Apart from this, speeches by Fed officials will influence the USD, which, along with Oil price dynamics, should provide a fresh impetus to the USD/CAD pair.

Technical levels to watch