USD/CAD retreats from two-week tops, downside seems limited

• USD/CAD witnessed a modest pullback from near two-week tops touched earlier this Tuesday.
• A goodish rebound in crude oil prices underpinned the loonie and exerted downward pressure.
• Rising bets for an early Fed taper acted as a tailwind for the USD and should help limit the slide.

The USD/CAD pair edged lower heading into the European session and dropped to fresh daily lows, around the 1.2565-60 region in the last hour.

The pair struggle to capitalize on its recent positive move beyond the very important 200-day SMA and witnessed a modest pullback from two-week tops, around the 1.2590 region touched earlier this Tuesday. Crude oil prices gained positive traction on Tuesday and built on the overnight rebound from three-week lows. This, in turn, underpinned the commodity-linked loonie and was seen as a key factor that exerted some downward pressure on the USD/CAD pair.

That said, uncertainty about how the COVID-19 situation in China will evolve and what this means for oil demand might act as a headwind for the black gold. China – the world's top crude oil importer – reported more COVID-19 infections on Monday in the latest outbreak of the disease. Adding to this, authorities have also stepped up mass testing to contain local transmission of the highly contagious Delta variant of the coronavirus.

Apart from this, the underlying bullish sentiment surrounding the US dollar should help limit any meaningful slide, instead assist the USD/CAD pair to attract some dip-buying. Friday's stronger-than-expected US monthly jobs report marked another step towards the Fed's goal of substantial further progress in the labor market recovery. This, in turn, forced investors to started pricing in an interest rate hike, as soon as 2022 and benefitted the USD.

The market speculations were further fueled by Atlanta Fed President Raphael Bostic's comments on Monday. Speaking at an online event, Bostic said that the Fed could begin tapering between October and December, or even earlier if there is another month or two of strong job gains. The combination of factors pushed the US Treasury bond yields back above the 1.30% threshold, which was seen as another factor that acted as a tailwind for the greenback.

There isn't any major market-moving economic data due for release on Tuesday, either from the US or Canada, leaving the USD/CAD pair at the mercy of the US/oil price dynamics. Nevertheless, the fundamental backdrop remains tilted firmly in favour of bullish traders, warranting some caution before positioning for any meaningful corrective fall.

Technical levels to watch