USD/CAD remains on the defensive below 1.2600 mark

• USD/CAD prolonged its sideways price move and remained confined in the weekly trading range.
• Dovish Fed expectations acted as a headwind for the USD and capped the upside for the major.
• A softer tone around oil prices might undermine the loonie and help limit any deeper losses.

The USD/CAD pair edged lower during the early European session and slipped below the 1.2600 mark, back closer to the lower end of its weekly trading range in the last hour.

The pair, so far, has struggled to gain any meaningful traction and has been oscillating in a range since the beginning of this week. The US dollar languished near one-month lows amid uncertainty about the likely timing of the Fed's tapering plan and doubts about the US labour market recovery. This, in turn, was seen as a key factor that acted as a headwind for the USD/CAD pair.

In fact, the ADP report released on Wednesday showed that the US private-sector employers hired far fewer workers than expected in August. This further dashed hopes for an early lift-off, which was evident from a modest pullback in the US Treasury bond yields. Apart from this, the underlying bullish sentiment in the financial markets continued weighing on the safe-haven greenback.

However, a softer tone around crude oil prices might undermine demand for the commodity-linked loonie and help limit any deeper losses for the USD/CAD pair, at least for now. The black gold remained depressed after OPEC+ reaffirmed its commitment to raising supply despite worries that the recent rise in cases infected by the Delta variant of the coronavirus could dent global fuel demand.

Hence, it will be prudent to wait for some follow-through selling below the weekly trading range support, around the 1.2575-70 region, before placing aggressive bearish bets. A sustained break below will set the stage for an extension of the recent sharp pullback from mid-1.2900s, or YTD tops touched on August 20.

Market participants now look forward to the US economic docket, featuring the release of the usual Weekly Jobless Claims. Apart from this, a scheduled speech by Atlanta Fed President Raphael Bostic might influence the USD and provide some impetus to the USD/CAD pair. Traders might further take cues from oil price dynamics to grab some short-term opportunities around the major.

Technical levels to watch