USD/CAD remains confined in a range near multi-year lows, around 1.2100 mark

• A combination of factors assisted USD/CAD to hold steady near the 1.2100 mark on Tuesday.
• An uptick in US bond yields, weaker risk tone drove some haven flows towards the USD.
• Sliding crude oil prices undermined the loonie and extended some support to the major.
• The lack of follow-through buying warrant caution before positioning for any recovery.

The USD/CAD pair lacked any firm directional bias and was confined in a narrow trading band, around the 1.2100 mark through the first half of the European session.

The pair, so far, has struggled to register any meaningful recovery and remained well within the striking distance of near four-year lows touched in the previous session. The divergence in monetary policies adopted by the Bank of Canada and the Federal Reserve continued acting as a headwind for the USD/CAD pair.

The BoC reduced its weekly asset purchases at the April policy meeting and brought forward the guidance for the first interest rate hike to the second half of 2022. Conversely, the Fed maintained its stubbornly dovish bias and reassured to maintain the current accommodative monetary policy deeper into the recovery.

That said, a combination of factors extended some support to the USD/CAD pair and helped limit any further losses, at least for now. The US dollar found some support from a modest uptick in the US Treasury bond yields, led by speculations that rising inflation might force the Fed to tighten its monetary policy sooner rather than later.

Adding to this, a generally weaker tone surrounding the global equity markets further drove some haven flows towards the safe-haven USD. On the other hand, retreating crude oil prices – now down around 0.65% for the day – undermined the commodity-linked loonie. This was seen as another factor lending some support to the USD/CAD pair.

From a technical perspective, extremely oversold conditions on short-term charts further held bearish traders from placing fresh bets. However, the USD/CAD pair's inability to gain positive traction suggests that the recent well-established downtrend might still be far from being over, warranting caution before positioning for any meaningful recovery.

Technical levels to watch